STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Millions)
|
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|
|
|
|
|
|
|
|
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|
|
|
|
Fiscal Year Ended
|
|
|
January 28, 2017
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|
January 30, 2016
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|
January 31, 2015
|
|
Operating Activities:
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(1,497
|
)
|
|
$
|
379
|
|
|
$
|
135
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
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Depreciation
|
378
|
|
|
388
|
|
|
405
|
|
|
Amortization of intangibles
|
58
|
|
|
67
|
|
|
62
|
|
|
Loss (gain) on sale of businesses and assets, net
|
168
|
|
|
5
|
|
|
(27
|
)
|
|
Interest and fees paid from restricted cash account, net
|
66
|
|
|
—
|
|
|
—
|
|
|
Impairment of goodwill and long-lived assets
|
1,700
|
|
|
50
|
|
|
470
|
|
|
Inventory write-downs related to restructuring activities
|
—
|
|
|
1
|
|
|
26
|
|
|
Stock-based compensation
|
61
|
|
|
63
|
|
|
64
|
|
|
Excess tax benefits from stock-based compensation arrangements
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
|
Deferred income tax expense (benefit)
|
57
|
|
|
28
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|
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(49
|
)
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Other
|
19
|
|
|
11
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|
|
12
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|
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Changes in assets and liabilities:
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|
|
|
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|
Decrease (increase) in receivables
|
21
|
|
|
(19
|
)
|
|
(184
|
)
|
|
Decrease in merchandise inventories
|
63
|
|
|
18
|
|
|
62
|
|
|
Decrease (increase) in prepaid expenses and other assets
|
34
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|
|
(41
|
)
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|
138
|
|
|
Increase (decrease) in accounts payable
|
4
|
|
|
63
|
|
|
(59
|
)
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|
(Decrease) increase in accrued expenses and other liabilities
|
(140
|
)
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|
110
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|
|
(24
|
)
|
|
(Decrease) increase in other long-term obligations
|
(58
|
)
|
|
(140
|
)
|
|
13
|
|
|
Net cash provided by operating activities
|
934
|
|
|
978
|
|
|
1,043
|
|
|
|
|
|
|
|
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Investing Activities:
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|
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|
|
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Acquisition of property and equipment
|
(255
|
)
|
|
(381
|
)
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(361
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)
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|
Proceeds from the sale of property and equipment
|
14
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|
|
27
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|
|
5
|
|
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Sale of businesses, net
|
55
|
|
|
2
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|
|
59
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|
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Increase in restricted cash
|
(66
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)
|
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—
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|
|
—
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|
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Acquisition of businesses, net of cash acquired
|
(44
|
)
|
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(22
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)
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(78
|
)
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Cost method investments
|
(15
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)
|
|
—
|
|
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—
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|
|
Net cash used in investing activities
|
(311
|
)
|
|
(374
|
)
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
Financing Activities:
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|
|
|
|
|
|
Proceeds from the exercise of stock options and sale of stock under employee stock purchase plans
|
30
|
|
|
41
|
|
|
49
|
|
|
Proceeds from borrowings
|
187
|
|
|
7
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|
|
23
|
|
|
Payments on borrowings, including payment of deferred financing fees and capital lease obligations
|
(211
|
)
|
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(99
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)
|
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(50
|
)
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Cash dividends paid
|
(311
|
)
|
|
(308
|
)
|
|
(307
|
)
|
|
Excess tax benefits from stock-based compensation arrangements
|
—
|
|
|
5
|
|
|
1
|
|
|
Repurchase of common stock
|
(13
|
)
|
|
(24
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)
|
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(208
|
)
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Net cash used in financing activities
|
(318
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)
|
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(378
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)
|
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(493
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)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
7
|
|
|
(28
|
)
|
|
(48
|
)
|
|
Net increase in cash and cash equivalents
|
312
|
|
|
198
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|
|
127
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|
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Cash and cash equivalents at beginning of period
|
825
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|
|
627
|
|
|
492
|
|
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Cash and cash equivalents at end of period
|
1,137
|
|
|
825
|
|
|
619
|
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|
Add: Cash and cash equivalents attributed to disposal group held for sale at February 1, 2014
|
—
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|
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—
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|
|
8
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|
|
Cash and cash equivalents at the end of the period
|
$
|
1,137
|
|
|
$
|
825
|
|
|
$
|
627
|
|
See notes to consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note A
-
Summary of Significant Accounting Policies
Nature of Operations:
Staples, Inc. and subsidiaries ("Staples" or "the Company") is a world-class provider of products and services that serve the needs of business customers and consumers. Through its delivery and retail capabilities, Staples lets customers shop however and whenever they want, whether it’s in-store, online or on mobile devices. The Company has
two
reportable segments - North American Delivery and North American Retail (see
Note O
-
Segment Reporting
).
As discussed in
Note D
-
Discontinued Operations
, the Company's European operations are presented as discontinued operations in the consolidated financial statements. The Company also has operations in Australia, Asia, and South America, which are included in the Other category in the Company's segment reporting.
Unless otherwise stated, any reference to the consolidated statement of income in the notes to the consolidated financial statements refers to results from continuing operations.
Basis of Presentation:
The consolidated financial statements include the accounts of Staples, Inc. and its wholly and majority owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Fiscal Year:
Staples' fiscal year is the 52 weeks or 53 weeks ending on the Saturday closest to January 31. Fiscal year
2016
("
2016
") consisted of the
52
weeks ended
January 28, 2017
, fiscal year
2015
("
2015
") consisted of the
52
weeks ended
January 30, 2016
and fiscal year
2014
("
2014
") consisted of the
52
weeks ended
January 31, 2015
.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management of Staples to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents:
Staples considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables are typically settled in less than 3 days.
Receivables:
Receivables include trade receivables financed under regular commercial credit terms and other non-trade receivables. Gross trade receivables were
$1.2 billion
at both
January 28, 2017
and
January 30, 2016
. Concentrations of credit risk with respect to trade receivables are limited due to Staples' large number of customers and their dispersion across many industries and geographic regions.
An allowance for doubtful accounts has been recorded to reduce trade receivables to an amount expected to be collectible from customers based on specific evidence as well as historic trends. The allowance recorded at
January 28, 2017
and
January 30, 2016
was
$18 million
and
$21 million
, respectively.
Other non-trade receivables were
$362 million
at
January 28, 2017
and
$396 million
at
January 30, 2016
and consisted primarily of purchase and advertising rebates due from vendors under various incentive and promotional programs. Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold. Amounts expected to be received from vendors that represent reimbursement for specific, incremental costs incurred by the Company related to selling a vendor's products, such as advertising, are recorded as an offset to those costs when they are recognized in the consolidated statement of income.
Inventory:
Inventory is valued at the lower of weighted-average cost or market value. The Company reserves for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and its estimated market value using assumptions of future demand and market conditions.
Accounts Payable:
The Company has agreements with third parties to provide accounts payable tracking and payment services which facilitate participating suppliers' ability to finance payment obligations from the Company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions. The Company has no economic interest in the sale of these receivables. The Company's obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers' decisions to finance amounts under these arrangements. The Company presents these obligations as trade accounts payable.
Property and Equipment:
Property and equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Depreciation and amortization, which includes the amortization of assets recorded under capital lease obligations, are provided using the straight-line method over the following useful lives:
40 years
for buildings;
3
-
10 years
for furniture and fixtures; and
3
-
10 years
for equipment, which includes computer equipment and software with estimated useful
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
lives of
3
-
7 years
. Leasehold improvements are amortized over the shorter of the terms of the underlying leases or the estimated economic lives of the improvements. Asset retirement obligations are recognized when incurred and the related cost is amortized over the remaining useful life of the related asset. The following table presents the Company's property and equipment by major asset class for 2016 and 2015.
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|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Property and equipment:
|
|
|
|
|
|
Land and buildings
|
|
$
|
648
|
|
|
$
|
694
|
|
|
Leasehold improvements
|
|
1,071
|
|
|
1,068
|
|
|
Equipment
|
|
3,023
|
|
|
2,563
|
|
|
Furniture and fixtures
|
|
819
|
|
|
814
|
|
|
Total property and equipment
|
|
5,561
|
|
|
5,139
|
|
|
Less: Accumulated depreciation
|
|
4,414
|
|
|
3,853
|
|
|
Net property and equipment
|
|
$
|
1,147
|
|
|
$
|
1,286
|
|
|
|
|
|
|
|
Lease Acquisition Costs:
Lease acquisition costs, which are included in other assets, are recorded at cost and amortized using the straight-line method over the respective lease terms, including option renewal periods if renewal of the lease is reasonably assured, which range from
1
to
46
years. Lease acquisition costs, net of accumulated amortization, at
January 28, 2017
and
January 30, 2016
were
$4 million
and
$7 million
, respectively.
Fair Value of Financial Instruments:
The Company measures the fair value of financial instruments pursuant to the guidelines of Accounting Standards Codification ("ASC") Topic 820
Fair Value Measurement
("ASC Topic 820"), which establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).
Impairment of Goodwill:
The Company reviews goodwill for impairment annually, in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit might exceed its current fair value. For the annual test, the Company may perform an initial qualitative assessment for certain reporting units to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. For those reporting units for which the Company performs the two step impairment test, the Company determines fair value using a combination of the discounted cash flow analysis and guideline public company methods. The valuation process requires management to make assumptions and estimates regarding industry economic factors and the future profitability of the Company's businesses. It is the Company's policy to allocate goodwill and conduct impairment testing at a reporting unit level based on its most current business plans, which reflect changes the Company anticipates in the economy and the industry. The Company established, and continues to evaluate, its reporting units based on its internal reporting structure and defines such reporting units at the operating segment level or one level below.
Impairment of Long-Lived Assets:
The Company evaluates long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured based upon the estimated undiscounted cash flows expected to be generated from the use of an asset plus any net proceeds expected to be realized upon its eventual disposition. An impairment loss is recognized if an asset's carrying value is not recoverable and if it exceeds its fair value. Staples' policy is to evaluate long-lived assets for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows or other assets and liabilities.
Exit and Disposal Activities
: The Company's policy is to recognize costs associated with exit and disposal activities, including restructurings, when a liability has been incurred. Employee termination costs associated with ongoing benefit arrangements are accrued when the obligations are considered probable and can be reasonably estimated, while costs associated with one-time benefit arrangements generally are accrued when the key terms of the arrangement have been communicated to the affected employees. Costs related to ongoing lease obligations for vacant facilities are recognized once the Company has ceased using the facility, and the related liability is recorded net of estimated future sublease income. Payments made to terminate a lease agreement prior to the end of its term are accrued when the termination agreement is signed, or when notification is given to the
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
landlord if a lease agreement has a pre-existing termination clause. For property and equipment that the Company expects to retire at the time of a facility closing, the Company first reassesses the assets' estimated remaining useful lives and evaluates whether the assets are impaired on a held for use basis, and then accelerates depreciation as warranted.
Revenue Recognition:
The Company recognizes revenue from the sale of products and services when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. Revenue is recognized for product sales at the point of sale for the Company's retail operations and at the time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which are treated as a reduction of revenue. For coupons and rebates that are offered by manufacturers directly to customers and which are redeemable at multiple participating retailers, the Company records the reimbursement received from the manufacturer as sales revenue.
The Company evaluates whether it is appropriate to record the gross amount of product and service sales and related costs or the net amount earned as a commission. In making this determination, the Company considers several factors, including which party in the transaction is the primary obligor, the degree of inventory risk, which party establishes pricing, the Company's ability to select vendors, and whether it earns a fixed amount per transaction. Generally, when the Company is the party in the transaction with the primary obligation to the customer or is subject to inventory risk, revenue is recorded at the gross sale price, assuming other factors corroborate that the Company is the principal party in the transaction. If the Company is not primarily obligated and does not have inventory risk, it generally records the net amount as a commission earned.
Revenue arrangements with multiple deliverables that have value on a standalone basis are divided into separate units of accounting. Revenue is allocated to each deliverable using estimated selling prices if the Company does not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. The Company recognizes revenue for each unit of accounting based on the nature of the deliverable and the revenue recognition guidance applicable to each unit.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Cost of Goods Sold and Occupancy Costs:
Cost of goods sold and occupancy costs includes the costs of merchandise sold, inbound and outbound freight, receiving and distribution, and store and distribution center occupancy (including real estate taxes and common area maintenance).
Shipping and Handling Costs:
All shipping and handling costs are included as a component of cost of goods sold and occupancy costs.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses include payroll, advertising and other operating expenses for the Company's stores and delivery operations not included in cost of goods sold and occupancy costs.
Advertising:
Staples expenses the costs of producing an advertisement the first time the advertising takes place, except for the cost of direct response advertising, primarily catalog production costs, which are capitalized and amortized over their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid and other assets totaled
$2 million
and
$5 million
at
January 28, 2017
and
January 30, 2016
, respectively. The cost of communicating an advertisement is expensed when the communication occurs. Total advertising and marketing expense was
$376 million
,
$384 million
and
$382 million
for
2016
,
2015
and
2014
, respectively.
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with ASC Topics 505
Equity
and 718
Stock Compensation
. Stock-based compensation for restricted stock and restricted stock units is measured based on the closing market price of the Company's common stock price on the date of grant, less the present value of dividends expected to be paid on the underlying shares but foregone during the vesting period. Stock-based compensation for stock options is measured based on the estimated fair value of each award on the date of grant using a binomial valuation model. For awards with service conditions only, the Company recognizes stock-based compensation costs as expense on a straight-line basis over the requisite service period. For awards that include performance conditions, the Company recognizes compensation expense during the performance period to the extent achievement of the performance condition is deemed probable relative to targeted performance. A change in the Company's estimate of the probable outcome of a performance condition is accounted for in the period of the change by recording a cumulative catch-up adjustment.
Pension and Other Post-Retirement Benefits:
The Company maintains pension and post-retirement life insurance plans for certain employees globally. These plans include significant obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and inflation. The Company also makes assumptions regarding employee demographic factors such as
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
retirement patterns, mortality, turnover and the rate of compensation increases. These assumptions are evaluated annually. Expected return on plan assets is determined using fair market value. The Company calculates amortization of actuarial gains and losses using the corridor approach and the estimated remaining service of plan participants. As noted in
Note L
-
Pension and Other Post-Retirement Benefit Plans
, following the termination of the pension plan associated with the divested Staples Print Solution business in 2016 and the disposal of the Company's European operations in February 2017, the Company no longer has significant obligations related to pension plans.
Foreign Currency:
The assets and liabilities of Staples' foreign subsidiaries are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses relate to the settlement of assets or liabilities in a currency other than the functional currency. Foreign currency transaction losses in 2016, 2015 and 2014 were nil,
$4 million
, and nil, respectively. These amounts are included in
Other income (expense), net
.
Derivative Instruments and Hedging Activities:
The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify for hedge accounting are recorded in stockholders' equity as a component of accumulated other comprehensive income or as an adjustment to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are reported in earnings.
Accounting for Income Taxes:
Deferred income tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that are expected to be in effect when the temporary differences are expected to reverse. All deferred income tax assets and liabilities are classified as non-current in the consolidated balance sheets.
The Company accounts for uncertain tax provisions in accordance with ASC Topic 740
Income Taxes
. These provisions require companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any benefit can be recorded in the financial statements. An uncertain income tax position will not be recognized if it has less than a
50%
likelihood of being sustained.
Recent Accounting Pronouncements:
ASU No. 2014-09, Revenue from Contracts with Customers
In May 2014, a pronouncement was issued that creates common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance supersedes most preexisting revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with an option to adopt the standard one year earlier. Staples intends to adopt the new guidance in the first quarter of fiscal 2018. The new standard is to be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has not yet selected its method of adoption.
The Company is continuing to evaluate the potential effects of the standard on the Company's consolidated financial statements. The Company’s current analysis indicates that the most significant effect of the new standard relates to the Company's accounting for its Staples Rewards loyalty program. The Company currently accounts for this loyalty program by accruing a liability equal to the incremental cost of fulfilling its obligations to program participants. Under the new standard, the Company will defer revenue at the time Rewards are earned using a relative fair value approach. However, the impact of the new standard on the Company's revenue recognition related to the Rewards program is not expected to be material to the Company's consolidated financial statements. The Company will provide updates in 2017 related to the expected impact of adopting this standard as it performs further work related to this evaluation.
Other recent pronouncements
In January 2016, a pronouncement was issued that will impact the accounting for equity investments. The new guidance requires all equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. However, entities may elect to measure those equity investments that do not have readily determinable fair values at cost less impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The guidance also simplifies the impairment model for equity investments that do not have readily determinable fair values, and simplifies disclosure of equity instruments. The guidance is effective for annual reporting periods beginning after December 15,
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2017, including related interim periods. The Company is currently evaluating the potential impact of this pronouncement on its financial statements.
In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
In March 2016, a pronouncement was issued that aims to simplify several aspects of accounting and reporting for share-based payment transactions. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods. The Company plans to adopt this guidance in the first quarter of 2017. One provision within this pronouncement requires that excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of income, rather than within additional paid-in capital on the balance sheet. This adoption of this provision is to be applied prospectively. If adoption of this pronouncement had occurred in 2016, the impact to the Company's results of operations related to this provision would have been an increase in the provision for income taxes of
$21 million
. The impact of this provision on the Company's future results of operations will depend in part on the market prices for the Company's shares on the dates there are taxable events related to share awards, and therefore the impact is difficult to predict. The Company does not expect the other provisions within the pronouncement will have a material impact on its financial statements.
In August 2016, a pronouncement was issued that addresses diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. The new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. The standard, which is to be applied retrospectively, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In October 2016, a pronouncement was issued that aims to reduce the diversity in practice and complexity associated with accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The new pronouncement stipulates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted in the first interim period only. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In November 2016, a pronouncement was issued that requires a statement of cash flows to explain the change in cash and cash equivalents during the period inclusive of amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The pronouncement does not provide a definition of restricted cash. The pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments are to be applied using a retrospective transition method to each period presented. The Company plans to adopt this pronouncement in the first quarter of fiscal 2018. This pronouncement, upon adoption in 2018, is expected to result in a retrospective
$66 million
reduction of net cash provided by operating activities in the consolidated statement of cash flows for 2016, with a corresponding decrease in net cash used in investing activities. The Company will continue to monitor the potential impact of this pronouncement through the date of adoption.
In January 2017, a pronouncement was issued that aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This pronouncement stipulates that an entity should perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not exceeding the total amount of goodwill allocated to that reporting unit. The amendments in this pronouncement are to be applied on a prospective basis. This guidance will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
1, 2017. The Company plans to adopt this pronouncement in the first quarter of 2017. The Company does not expect this pronouncement will have a material impact on its financial statements.
Note B
—
Restructuring Charges
Restructuring Initiatives Related to Staples 20/20 Strategic Plan
In May 2016 the Company announced a strategic plan ("20/20 Plan") under which it plans to:
|
|
|
|
•
|
narrow its geographic focus to North America
|
|
|
|
|
•
|
accelerate mid-market growth
|
|
|
|
|
•
|
preserve profitability and rationalize excess capacity in its North American Retail stores
|
|
|
|
|
•
|
drive profit improvement and cost reduction across the company
|
Following the termination of its merger agreement with Office Depot and the announcement of the 20/20 Plan, the Company announced in May 2016 that Ron Sargent would step down from the position of Chief Executive Officer of the Company effective June 14, 2016. The Company and Mr. Sargent entered into a letter agreement providing for monthly payments of
$166,740
for a period of 24 months commencing February 2017, as well as certain benefits with an estimated cost of
$875,000
. The Company recorded a liability for these severance benefits in the second quarter of 2016, the related cost for which is included in Restructuring charges in the consolidated statement of income.
In connection with the 20/20 Plan, in the fourth quarter of 2016 the Company realigned its business segments (see
Note O
-
Segment Reporting
) and divested its retail stores business in the United Kingdom, and in February 2017 it completed the disposal of a controlling interest in its European operations (see
Note D
-
Discontinued Operations
). As a result of these initiatives, in the fourth quarter of 2016 the Company recorded charges of
$15 million
for severance primarily related to the restructuring of corporate general and administrative functions that support its business units. These costs are is included in Restructuring charges in the consolidated statement of income for 2016.
In connection with the 20/20 Plan, the Company also announced a new multi-year cost savings plan which is expected to generate approximately
$300 million
of annualized pre-tax cost savings by the end of 2018, primarily by reducing end-to-end product costs, continuing to evolve promotional strategies, increasing the mix of Staples Brand products, driving savings in supply chain, eliminating fixed costs in retail stores, and generating additional efficiency savings across the entire organization. In connection with this costs savings plan, in the third quarter of 2016 the Company recorded charges of
$4 million
related to continuing operations and
$1 million
related to discontinued operations.
In connection with its plan to preserve profitability in its North American retail stores, the Company expects to close approximately 70 North American retail stores in 2017. The Company does not expect to incur material charges in 2017 related to these closures. The Company expects to incur charges in 2017 and beyond related to other initiatives under the 20/20 Plan. The nature and timing of such charges will depend upon the actions that are taken, and cannot be reasonably estimated at this time.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The table below shows a reconciliation of the beginning and ending liability balances associated with the 20/20 Plan (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
20/20 Plan
|
|
|
|
|
Employee-Related
|
|
|
Accrued restructuring balance as of January 30, 2016
|
|
$
|
—
|
|
|
|
Charges
|
|
25
|
|
|
|
Cash payments
|
|
(2
|
)
|
|
|
Foreign currency translations
|
|
—
|
|
|
|
Accrued restructuring balance as of January 28, 2017
|
|
$
|
23
|
|
|
Of the
$25 million
of charges recorded in 2016,
$23 million
is included in Restructuring charges and
$2 million
is included in Pretax loss from discontinued operations in the consolidated statement of income. All of these charges relate to functional departments that correspond with selling, general and administrative expense. Of the
$23 million
accrued restructuring liability recorded on the consolidated balance sheet at January 28, 2017,
$21 million
is included in Accrued expenses and other current liabilities and
$2 million
is included in Current liabilities of discontinued operations. The Company expects that payments related to these liabilities will be substantially completed by the end of 2018.
2014 Restructuring Plan
In 2014 the Company announced a plan to close at least 225 retail stores in North America by the end of fiscal year 2015 (the “Store Closure Plan”). This plan was extended to include additional closures in 2016. Pursuant to this plan the Company closed 169 stores in 2014,
73
stores in
2015
, and
48
stores in
2016
.
In addition, in 2014 the Company initiated a cost savings plan to generate annualized pre-tax savings of approximately
$500 million
by the end of fiscal 2015. The Company reinvested some of the savings in its strategic initiatives.
The actions taken related to the
$500 million
cost savings plan, together with the actions taken related to the Store Closure Plan, are herein referred to as the "2014 Plan".
As a result of actions taken under the 2014 Plan, the Company recorded pre-tax charges of
$48 million
in 2016,
$170 million
in 2015 and
$245 million
in 2014. The table below provides a summary of the charges recorded for each major type of cost associated with the 2014 Plan. The table also summarizes the costs incurred by reportable segment, and the amount of costs reflected in continuing operations versus discontinued operations (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred
|
|
|
|
2016
|
|
2015
|
2014
|
|
Employee related costs
|
|
$
|
(6
|
)
|
|
$
|
83
|
|
$
|
45
|
|
|
Contractual obligations
|
|
15
|
|
|
63
|
|
109
|
|
|
Other associated costs
|
|
6
|
|
|
12
|
|
17
|
|
|
Total restructuring charges
|
|
15
|
|
|
158
|
|
171
|
|
|
Impairment of long-lived assets and accelerated depreciation
|
|
33
|
|
|
11
|
|
46
|
|
|
Inventory write-downs
|
|
—
|
|
|
1
|
|
26
|
|
|
Consolidated pre-tax charges
|
|
$
|
48
|
|
|
$
|
170
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
North American Retail
|
|
$
|
51
|
|
|
$
|
79
|
|
$
|
178
|
|
|
North American Delivery
|
|
(2
|
)
|
|
29
|
|
50
|
|
|
Other
|
|
—
|
|
|
10
|
|
5
|
|
|
Total pre-tax charges, continuing operations
|
|
$
|
49
|
|
|
$
|
118
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
Pretax charges, discontinued operations
|
|
$
|
(1
|
)
|
|
$
|
52
|
|
$
|
12
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
In connection with the 2014 Plan, the Company recorded fixed asset impairment charges of
$33 million
in
2016
,
$6 million
in
2015
, and
$37 million
in 2014 primarily related to the Store Closure Plan. See
Note C
-
Goodwill and Long-Lived Assets
for additional information. Also related to the 2014 Plan, the Company recorded accelerated depreciation of
$5 million
and
$9 million
in
2015
and 2014, respectively, primarily in connection with the closure of facilities supporting the Company's North American Delivery operations.
In addition, the Company recorded inventory write-downs of
$1 million
and
$26 million
in
2015
and 2014, respectively, related to the rationalization of SKUs pursuant to the Company's efforts to improve efficiencies in its delivery fulfillment operations as well as the retail store closures. The inventory write-downs were included in Cost of goods sold and occupancy costs in the consolidated statements of income.
The Company does not expect to incur material costs in future periods related to the 2014 Plan.
The table below shows a reconciliation of the beginning and ending liability balances for each major type of cost associated with the 2014 Plan (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Plan
|
|
|
|
Employee Related
|
|
Contractual Obligations
|
|
Other
|
|
Total
|
|
Accrued restructuring balance as of January 31, 2015
|
|
$
|
31
|
|
|
$
|
83
|
|
|
$
|
2
|
|
|
$
|
116
|
|
|
Charges
|
|
83
|
|
|
63
|
|
|
12
|
|
|
158
|
|
|
Cash payments
|
|
(40
|
)
|
|
(62
|
)
|
|
(13
|
)
|
|
(115
|
)
|
|
Foreign currency translations
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Accrued restructuring balance as of January 30, 2016
|
|
$
|
74
|
|
|
$
|
83
|
|
|
$
|
1
|
|
|
$
|
158
|
|
|
Charges
|
|
2
|
|
|
16
|
|
|
6
|
|
|
24
|
|
|
Adjustments
|
|
(7
|
)
|
|
(2
|
)
|
|
—
|
|
|
(9
|
)
|
|
Cash payments
|
|
(48
|
)
|
|
(47
|
)
|
|
(7
|
)
|
|
(102
|
)
|
|
Foreign currency translations
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Accrued restructuring balance as of January 28, 2017
|
|
$
|
21
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring, Continuing Operations, as of January 28, 2017
|
|
$
|
7
|
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
Accrued Restructuring, Discontinued Operations, as of January 28, 2017
|
|
$
|
14
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
16
|
|
In addition to the contractual obligations shown in the tables above, the Company also had related liabilities of
$12 million
and
$8 million
recorded on the consolidated balance sheet as of
January 28, 2017
and January 30, 2016, respectively, which primarily represent amounts previously accrued to reflect rent expense on a straight-line basis for leased properties which the Company has now ceased using.
For the restructuring liabilities associated with the 2014 Plan recorded on the consolidated balance sheet at
January 28, 2017
,
$29 million
are included within Other long-term obligations,
$27 million
are included within Accrued expenses and other current liabilities, and $
16 million
are included in Current liabilities of discontinued operations. The Company expects that payments related to employee related liabilities associated with the 2014 Plan will be substantially completed by the end of fiscal year 2017. The Company anticipates that payments related to facility lease obligations will be completed by the end of fiscal year 2025.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The restructuring charges related to continuing operations are presented within Restructuring charges in the Company's consolidated statement of income, while the charges related to discontinued operations are included in Pretax loss (income) from discontinued operations. The tables below shows how the restructuring charges would have been allocated if the Company had recorded the expenses within the functional departments of the restructured activities (in millions) for continuing operations and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
2014 Plan
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Cost of goods sold and occupancy costs
|
|
$
|
22
|
|
|
$
|
60
|
|
|
$
|
122
|
|
|
Selling, general and administrative
|
|
(6
|
)
|
|
46
|
|
|
37
|
|
|
Total
|
|
$
|
16
|
|
|
$
|
106
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
2014 Plan
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Cost of goods sold and occupancy costs
|
|
$
|
(2
|
)
|
|
$
|
10
|
|
|
$
|
1
|
|
|
Selling, general and administrative
|
|
1
|
|
|
42
|
|
|
11
|
|
|
Total
|
|
$
|
(1
|
)
|
|
$
|
52
|
|
|
$
|
12
|
|
Note C
—
Goodwill and Long-Lived Assets
Goodwill
Goodwill impairment charges recognized in the fourth quarter of 2016
As noted in
Note O
-
Segment Reporting
, in the fourth quarter of 2016 the Company changed its reportable segments as a result of an organizational realignment related to its 20/20 strategic plan. The realignment also resulted in changes for its reporting units. For its annual goodwill impairment test performed in the fourth quarter of 2016, the Company first performed a test based on the preexisting reporting unit structure, and then to the extent goodwill balances remained after that test, it performed a second test based on the new reporting unit structure.
In the first step of the impairment test, the Company determined the fair value of its reporting units using a combination of the income and market approaches, specifically the discounted cash flow (“DCF”) and guideline public company methods. In conjunction with the Company's annual cycle for planning and budgeting, the Company updated its long-term projections for its reporting units, and incorporated these updated projections in the valuation models. Based on these updates, the Company determined that the carrying values of its U.S. Stores & Online, Australia, and China reporting units exceeded their respective fair values. As a result, the Company performed step two of the impairment test to determine the amount of the impairment charges for each reporting unit.
In the second step of the impairment test, the Company assigned the reporting unit’s fair value to its individual assets and liabilities, including any unrecognized assets or liabilities, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment charge. The fair value estimates incorporated in step two for intangible assets were primarily based on the income approach, specifically the multi-period excess earnings and relief from royalty methods. For real property, the Company used a combination of the income and market approaches to determine fair value. For leasehold interests, the Company used the income approach to determine fair value.
Based on the results of step two of the impairment test, in the fourth quarter of 2016 the Company recorded impairment charges of
$628 million
for U.S. Stores & Online,
$72 million
for China, and
$48 million
for Australia. As of the end of 2016, these reporting units have no remaining goodwill. U.S. Stores & Online was a component of the Company's former North American
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stores & Online segment; under the Company's segment structure at the end of 2016, U.S. Stores is a component of the Company's North American Retail segment, and Online is a component of the Company's North American Delivery segment. Australia and China are included in the Other category in the Company's segment reporting.
The Company had previously disclosed that these reporting units were at an increased risk of an impairment charge. The key factors underlying these impairment charges include the following:
|
|
|
|
•
|
Under the Staples 20/20 strategic plan, which was announced in 2016, the Company plans to narrow its geographic focus to North America and drive growth in the mid-market customer segment. The Company's North American retail stores and its international businesses are not key elements of the Company's growth strategy. In fourth quarter of 2016, the Company realigned its organization and changed its reportable segments to align with the 20/20 plan (see
Note O
-
Segment Reporting
). The Company's updated long-term projections align with the 20/20 plan and reflect the recent operating results of the reporting units.
|
|
|
|
|
•
|
The Company’s retail stores in the U.S. have experienced declines in sales and profits due to changes in customer buying patterns, with customers increasingly shopping at online retailers. In addition, growth for Staples.com has been weaker than expected. Although the Company continues to undertake initiatives to improve the productivity of its retail stores in the U.S. and increase customer traffic and conversion at Staples.com, while also pursuing cost savings opportunities, the Company assigned considerable weight to the reporting unit's historical results when deriving the fair value of the U.S. Stores & Online reporting unit.
|
|
|
|
|
•
|
The China reporting unit has a history of incurring operating losses, and although this business has experienced strong sales growth over the past two years, much of this growth has related to low-margin customers, and as a result the business has experienced challenges translating this growth into significant profits. In addition, management expects growth may slow in the future as a result of increased competition and slowing economic growth.
|
The valuation methodologies used in step two incorporated unobservable inputs reflecting significant estimates and assumptions made by management. Accordingly, the Company classified these measurements as Level 3 within the fair value hierarchy. Key inputs included expected sales growth rates, customer attrition rates, operating income margins, market-based royalty rates, market comparables for real property and leasehold interests, and discount rates.
Goodwill impairment charges recognized in the second quarter of 2016
In the second quarter of 2016, based on continued adverse business trends and following changes in the Company’s strategic plans after the termination of the proposed Office Depot merger, the Company identified certain factors that indicated it was more likely than not that the fair value of the Europe Delivery reporting unit was lower than its carrying value. These factors included:
|
|
|
|
•
|
Europe Delivery continued to experience operating challenges during the second quarter of 2016, and was expected to experience further challenges in the near to mid-term as a result of delays in its restructuring and transformation activities.
|
|
|
|
|
•
|
Britain’s decision in June 2016 to exit the European Union (“Brexit”) resulted in increased uncertainty in the economic and political environment in Europe.
|
|
|
|
|
•
|
In May 2016, Staples announced its Staples 20/20 strategic plan under which it plans to focus on its North American businesses, reducing its emphasis on International Operations. The Company announced it was exploring strategic alternatives for its European operations, and hired outside advisors to evaluate a potential sale of the business.
|
|
|
|
|
•
|
Information obtained in the second quarter during the process of marketing the European business for sale, including the likely absence of strategic buyers and the indications of value received from potential financial buyers.
|
Based on its consideration of the factors above, the Company concluded it was necessary to perform an interim goodwill impairment test in the second quarter of 2016 for the Europe Delivery reporting unit pursuant to the guidelines of ASC Topic 350, "Intangibles - Goodwill and Other".
In the first step of the impairment test, the Company determined the fair value of the reporting unit using a combination of the income and market approaches, specifically the discounted cash flow (“DCF”) and guideline public company methods. The resulting fair value of the reporting unit was lower than its carrying value, and therefore the reporting unit failed step one of the impairment test. As a result, the Company performed step two of the impairment test to determine the amount of the impairment charge.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The fair value estimates incorporated in step two for intangible assets were primarily based on the income approach, specifically the multi-period excess earnings and relief from royalty methods. For owned real property, the Company used a combination of the income and market approaches to determine fair value. Based on the results of the second step of the impairment test, the Company determined that the reporting unit’s
$630 million
of goodwill was fully impaired, and therefore it recorded an impairment charge of this amount in the second quarter of 2016. This charge is included in Pretax loss from discontinued operations in the Company's consolidated statement of income for 2016.
The valuation methodologies used in step two incorporated unobservable inputs reflecting significant estimates and assumptions made by management. Accordingly, the Company classified these measurements as Level 3 within the fair value hierarchy. Key inputs included expected sales growth rates, customer attrition rates, operating income margins, market-based royalty rates, market comparables for real property, and discount rates.
As noted in
Note D
-
Discontinued Operations
, in the fourth quarter of 2016 the Company completed the sale of its retail stores business in the United Kingdom, and in February 2017 it completed the sale of a controlling interest in its remaining European operations.
Goodwill impairment testing in 2015 and 2014
The Company recorded no goodwill impairment charges during 2015. In 2014 the Company recorded goodwill impairment charges of
$410 million
, including
$280 million
related to Australia,
$116 million
related to China, and
$13 million
related to South America. These reporting units are now included in the Other category in the Company's segment reporting.
The changes in the carrying amounts of goodwill during fiscal
2015
and
2016
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
at January 31, 2015
|
|
2015 Additions
|
|
Foreign
Exchange
Fluctuations and Adjustments
|
|
Goodwill
at January 30, 2016
|
|
Accumulated impairment as of January 30, 2016
|
|
North American Delivery
|
|
$
|
1,247
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
—
|
|
|
North American Retail
|
|
662
|
|
|
1
|
|
|
(6
|
)
|
|
657
|
|
|
—
|
|
|
Other operations
|
|
131
|
|
|
—
|
|
|
(5
|
)
|
|
125
|
|
|
(410
|
)
|
|
Continuing Operations
|
|
2,040
|
|
|
4
|
|
|
(11
|
)
|
|
2,032
|
|
|
(410
|
)
|
|
Discontinued Operations
|
|
640
|
|
|
3
|
|
|
(23
|
)
|
|
621
|
|
|
(771
|
)
|
|
Consolidated
|
|
$
|
2,680
|
|
|
$
|
7
|
|
|
$
|
(34
|
)
|
|
$
|
2,653
|
|
|
$
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
at January 30, 2016
|
|
2016 Additions
|
|
2016 Impairments
|
|
2016 Disposals
|
|
Foreign
Exchange
Fluctuations and Adjustments
|
|
Goodwill
at January 28, 2017
|
|
Accumulated impairment as of January 28, 2017
|
|
North American Delivery
|
|
$
|
1,250
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
(3
|
)
|
|
$
|
1,258
|
|
|
$
|
—
|
|
|
North American Retail
|
|
657
|
|
|
—
|
|
|
(628
|
)
|
|
—
|
|
|
3
|
|
|
32
|
|
|
(628
|
)
|
|
Other operations
|
|
125
|
|
|
—
|
|
|
(120
|
)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(530
|
)
|
|
Continuing Operations
|
|
2,032
|
|
|
30
|
|
|
(748
|
)
|
|
(19
|
)
|
|
(5
|
)
|
|
1,290
|
|
|
(1,158
|
)
|
|
Discontinued Operations
|
|
621
|
|
|
—
|
|
|
(630
|
)
|
|
—
|
|
|
9
|
|
|
—
|
|
|
(1,401
|
)
|
|
Consolidated
|
|
$
|
2,653
|
|
|
$
|
30
|
|
|
$
|
(1,378
|
)
|
|
$
|
(19
|
)
|
|
$
|
4
|
|
|
$
|
1,290
|
|
|
$
|
(2,559
|
)
|
Long-Lived Assets
The Company recorded long-lived asset impairment charges related to continuing operations of
$35 million
,
$37 million
and
$59 million
in 2016, 2015, and 2014, respectively. The following is a summary of these charges:
|
|
|
|
•
|
The
$35 million
of charges in 2016 primarily relate to the impairment of fixed assets at North American retail stores.
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
•
|
The
$37 million
of charges in 2015 include
$22 million
related to the disposal of information technology assets related to the Company's North American retail stores, and
$15 million
related to the impairment of fixed assets, primarily at North American retail stores.
|
|
|
|
|
•
|
The
$59 million
of charges in 2014 primarily relate to the impairment of fixed assets at North American retail stores.
|
These charges related to retail store assets were based on measurements of the fair value of the impaired assets derived using the income approach, specifically the DCF method, which incorporated Level 3 inputs as defined in ASC 820. The Company considered the expected net cash flows to be generated by the use of the assets through the store closure dates, as well as the expected cash proceeds from the disposition of the assets, if any.
The Company recorded long-lived asset impairment charges related to discontinued operations of
$288 million
, $
14 million
, and $
1 million
in 2016, 2015, and 2014, respectively. The following is a summary of the these charges:
|
|
|
|
•
|
The
$288 million
of charges in 2016 includes
$231 million
related to the impairment of long-lived assets upon the initial classification of the Company's European operations as held for sale (see
Note D
-
Discontinued Operations
),
$30 million
related to a customer relationship asset related to the Company's European operations, and
$27 million
related to the impairment of assets at European retail stores.
|
|
|
|
|
•
|
The
$14 million
of charges in 2015 and
$1 million
charge in 2014 primarily related to the impairment of assets at European retail stores.
|
Intangible assets
The Company's intangible assets are amortized on a straight-line basis over their estimated useful lives and are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Customer relationships
|
|
$
|
475
|
|
|
$
|
(319
|
)
|
|
$
|
156
|
|
|
$
|
525
|
|
|
$
|
(347
|
)
|
|
$
|
178
|
|
|
Technology
|
|
74
|
|
|
(30
|
)
|
|
44
|
|
|
72
|
|
|
(20
|
)
|
|
52
|
|
|
Tradenames
|
|
9
|
|
|
(4
|
)
|
|
5
|
|
|
9
|
|
|
(4
|
)
|
|
5
|
|
|
Total
|
|
$
|
558
|
|
|
$
|
(353
|
)
|
|
$
|
205
|
|
|
$
|
606
|
|
|
$
|
(371
|
)
|
|
$
|
235
|
|
Estimated future amortization expense associated with the intangible assets at
January 28, 2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Total
|
|
2017
|
|
$
|
52
|
|
|
2018
|
|
50
|
|
|
2019
|
|
41
|
|
|
2020
|
|
26
|
|
|
2021
|
|
17
|
|
|
Thereafter
|
|
19
|
|
|
|
|
$
|
205
|
|
Note D
—
Discontinued Operations
During 2016 the Company announced its Staples 20/20 strategic plan, under which the Company plans to focus on growth opportunities in North America. In connection with this plan, in the fourth quarter of 2016 the Company disposed of its retail business in the United Kingdom and entered into an agreement to sell a controlling interest in its remaining European operations. The Company closed on the sale of this controlling interest in February 2017. The Company has presented its combined European operations as discontinued operations in the Company’s consolidated financial statements. The European operations were a component of the Company’s former International Operations segment.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Disposal of retail store business in the United Kingdom
On November 18, 2016 the Company completed the sale of
100%
of the outstanding shares of the entities operating to its retail stores business in the United Kingdom (“UK Retail”) for total consideration of
one
pound sterling. Upon completion of the transaction, Staples delivered the UK Retail business to the buyer with approximately
$28 million
(£
23 million
) of unrestricted cash on-hand. The Company recognized a
$114 million
loss on sale related to this transaction, which is included in Loss on sale related to discontinued operations in the consolidated statement of income for 2016.
The
$114 million
loss on sale is inclusive of
$34 million
related to the fair value of the Company’s liability related to certain lease obligations which the Company will continue to guarantee after completion. The total amount of lease obligations for which the Company is a guarantor is approximately
$160 million
(£
127 million
). The related leases expire at various dates through 2027, with a weighted average remaining term of
5.7
years, and the terms may not be extended. The Company would be required to make payment under these arrangements in the event a settlement is negotiated and agreed upon with the applicable landlord and a release of the corresponding lease obligations is obtained, or upon a default by the buyer. The fair value of the guarantee liability was derived using the income approach, incorporating Level 3 inputs as defined in ASC 820. Key inputs and assumptions included probability of default, market rental rates, costs to obtain a release from future lease obligations, and discount rates.
Other than with respect to the Company's obligations related to the guarantees, the Company does not expect to have significant continuing involvement with UK Retail after completion.
Disposal of remaining European Operations subsequent to the end of fiscal 2016
On December 7, 2016, the Company entered into an agreement ("Signing Protocol") with an affiliate of Cerberus Capital Management, L.P. (“Cerberus”), pursuant to which Cerberus made a binding offer to purchase the Shares (defined below) related to the Company’s remaining European operations (“European Operations”). Appended to the Signing Protocol was a form of the share purchase agreement ("SPA") which incorporates the key term and conditions of the sale. The Company’s acceptance of the offer and its entry into the SPA was subject to completion of certain European works council consultation procedures and applicable waiting periods required by relevant European legislation and practice.
On February 2, 2017, following the completion of these consultation procedures and waiting periods, Staples and Cerberus executed the SPA, which was amended on February 23, 2017, and on February 27, 2017 the parties completed the transaction. Following the closing, Staples will provide certain customary transitional services during a period of up to
36
months, and will partner with the disposed operations on managing certain global customer accounts. Commercial transactions between the parties following the closing of the transaction are not expected to be significant.
Under the terms of the SPA, as amended, the Company sold to Cerberus
85%
of the common shares and
100%
of the preferred shares in the Company's subsidiary holding the European Operations (collectively, the “Shares”) for total consideration of €
50 million
($
53 million
). The purchase consideration also provides the divested business with a perpetual, royalty-free license to use the Staples trade name on the European continent, with exclusivity within that territory. Staples will retain
15%
of the common shares, which the Company plans to account for using the cost method of accounting. The preferred shares provide for a liquidation preference equal to €
50 million
and a
10%
cumulative preferred dividend. Upon completion of the transaction, Staples delivered the European Operations with approximately €
166 million
(
$175 million
) related to a preliminary estimate of the requisite unrestricted cash, which is equal to (i) €
20 million
, plus (ii) €
146 million
relating to indebtedness, underfunded pension liabilities, working capital, and certain other adjustments, plus an additional €
6 million
(
$7 million
) related to other obligations outlined in the SPA. The preliminary estimate of the unrestricted cash amount is subject to adjustment based on finalization of the completion accounts, which is to occur no later than
90
days following closing. The preliminary unrestricted cash amount may vary significantly from the actual amount calculated as of completion.
The European Operations are classified as held for sale at January 28, 2017. As a result of this classification, the Company recorded an impairment charge of
$231 million
during the fourth quarter of 2016, related to
$226 million
of property plant and equipment and
$5 million
related to intangible assets. These charges are included in Loss from discontinued operations in the consolidated statement of income. In the first quarter of 2017, the Company expects to record additional losses in connection with the closing of this transaction, which are currently estimated to be between $
800
-
900 million
, including the release of cumulative translation losses and the write-off of deferred pension costs recorded as a component of accumulated other comprehensive income.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The table below provides a reconciliation of the carrying amounts of the major classes of assets and liabilities of the discontinued operations to the amounts presented separately in the consolidated balance sheets. The carrying amounts as of January 30, 2016 include balances related to UK Retail, whereas the amounts as of January 28, 2017 do not since the business had been divested as of that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
|
|
Receivables, net
|
$
|
294
|
|
|
$
|
356
|
|
|
|
|
Merchandise inventories
|
188
|
|
|
287
|
|
|
|
|
Property, plant and equipment
|
226
|
|
|
300
|
|
|
|
|
Goodwill
|
—
|
|
|
621
|
|
|
|
|
Intangible assets
|
5
|
|
|
39
|
|
|
|
|
Other assets
|
86
|
|
|
87
|
|
|
|
|
Loss recognized on classification as held for sale
|
(231
|
)
|
|
—
|
|
|
|
|
Assets of discontinued operations
|
568
|
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
174
|
|
|
209
|
|
|
|
|
Accrued expenses and other current liabilities
|
145
|
|
|
193
|
|
|
|
|
Other liabilities
|
83
|
|
|
69
|
|
|
|
|
Liabilities of discontinued operations
|
$
|
402
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table provides the major classes of line items constituting the results of operations for discontinued operations for 2016, 2015, and 2014. This table includes the results of operations for UK Retail through November 18, 2016, the date of its disposition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
|
Sales
|
$
|
1,970
|
|
|
$
|
2,295
|
|
|
$
|
2,808
|
|
|
|
Cost of goods sold and occupancy costs
|
1,451
|
|
|
1,688
|
|
|
2,045
|
|
|
|
Gross profit
|
519
|
|
|
607
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
524
|
|
|
606
|
|
|
720
|
|
|
|
Impairment of goodwill and long-lived assets
|
686
|
|
|
14
|
|
|
1
|
|
|
|
Restructuring costs
|
—
|
|
|
46
|
|
|
13
|
|
|
|
Amortization of intangibles
|
7
|
|
|
13
|
|
|
14
|
|
|
|
Total operating expenses
|
1,217
|
|
|
679
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of businesses and assets, net
|
1
|
|
|
—
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
(697
|
)
|
|
(72
|
)
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other, net
|
(3
|
)
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Pretax operating (loss) income of discontinued operations
|
(700
|
)
|
|
(72
|
)
|
|
15
|
|
|
|
Loss recognized on classification as held for sale
|
(231
|
)
|
|
—
|
|
|
—
|
|
|
|
Loss on sale of discontinued operations
|
(114
|
)
|
|
—
|
|
|
—
|
|
|
|
Total pretax (loss) income of discontinued operations
|
(1,045
|
)
|
|
(72
|
)
|
|
15
|
|
|
|
Income tax (benefit) expense
|
(7
|
)
|
|
11
|
|
|
5
|
|
|
|
(Loss) income of discontinued operations
|
$
|
(1,038
|
)
|
|
$
|
(83
|
)
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes depreciation and capital expenditures for discontinued operations for 2016, 2015, and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
|
Depreciation
|
$
|
39
|
|
|
$
|
41
|
|
|
$
|
48
|
|
|
|
Acquisition of property & equipment
|
28
|
|
|
50
|
|
|
55
|
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note E
—
Sale of Businesses and Assets
In April 2016, Staples entered into an agreement to sell substantially all of the assets and transfer certain liabilities related to its commercial printing solutions business (Staples Print Solutions, or “SPS”) for cash consideration of
$85 million
. The transaction closed on July 5, 2016. The sale price was subject to a working capital adjustment that was finalized in the fourth quarter of 2016, the impact of which was not material. The Company recognized a total loss of
$57 million
on the sale of SPS, including
$9 million
related to the settlement of pension obligations related to this business. Following the settlement of the pension obligations, the Company terminated the related pension plan. The loss on sale also includes the impairment of
$19 million
of goodwill and
$13 million
of long-lived assets recognized upon the initial classification of SPS as held for sale in the second quarter of 2016. The loss is included in (Loss) gain on sale of businesses and assets, net in the condensed consolidated statement of income for 2016. SPS was a component of the Company’s North American Delivery segment.
SPS’s pretax income in 2016 through the date of disposal was
$10 million
. SPS's pretax income in 2015 and 2014 was
$22 million
and
$29 million
, respectively. The table below shows the major classes of SPS’s assets and liabilities at the time of the disposition (in millions):
|
|
|
|
|
|
|
|
ASSETS
|
July 5, 2016
|
|
Receivables
|
$
|
51
|
|
|
Inventories
|
57
|
|
|
Other assets
|
4
|
|
|
Total assets
|
$
|
112
|
|
|
|
|
|
LIABILITIES
|
|
|
Accounts payable and other current liabilities
|
$
|
12
|
|
|
Total liabilities
|
$
|
12
|
|
During 2016, the Company also sold certain real estate property, recognizing a net gain of
$2 million
.
Additionally, during 2016, the Company completed the sale of its retail stores business in the United Kingdom - see
Note D
-
Discontinued Operations
.
During 2015, the Company sold certain real estate properties and other property and equipment, as well as a small business unit in Australia. The company recognized a net loss of in
$5 million
in 2015 related to these sales.
During the first quarter of 2014, the Company completed the sale of its Smilemakers, Inc. business unit, recognizing a gain of
$23 million
. Smilemakers, Inc. was a component of the Company's North American Delivery segment. The Company also completed the sale of a small U.S. business that was a component of the Company's North American Delivery segment in the third quarter of 2014, recognizing a gain of
$6 million
.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note F
—
Accrued Expenses and Other Current Liabilities
The major components of
Accrued expenses and other current liabilities
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Taxes
|
|
$
|
183
|
|
|
$
|
176
|
|
|
Employee related
|
|
304
|
|
|
314
|
|
|
Restructuring reserves
|
|
53
|
|
|
82
|
|
|
Advertising and marketing
|
|
77
|
|
|
65
|
|
|
Other
|
|
406
|
|
|
523
|
|
|
Total
|
|
$
|
1,023
|
|
|
$
|
1,160
|
|
Note G
—
Debt and Credit Agreements
The major components of the Company's outstanding debt are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 2018 Notes
|
|
$
|
499
|
|
|
$
|
498
|
|
|
January 2023 Notes
|
|
497
|
|
|
496
|
|
|
Other lines of credit
|
|
1
|
|
|
2
|
|
|
Capital lease obligations and other notes payable
|
|
51
|
|
|
35
|
|
|
|
|
1,048
|
|
|
1,031
|
|
|
Less: current portion
|
|
(519
|
)
|
|
(15
|
)
|
|
Net long-term debt
|
|
$
|
529
|
|
|
$
|
1,016
|
|
Aggregate annual maturities of long-term debt and capital lease obligations are as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Year:
|
Total
|
|
2017
|
$
|
519
|
|
|
2018
|
29
|
|
|
2019
|
3
|
|
|
2020
|
1
|
|
|
2021
|
—
|
|
|
Thereafter
|
500
|
|
|
|
$
|
1,052
|
|
|
Unamortized discounts and debt issuance costs
|
(4
|
)
|
|
|
$
|
1,048
|
|
Future minimum lease payments under capital leases of
$49 million
are included in aggregate annual maturities shown above. Staples entered into
$34 million
and
$12 million
of new capital lease obligations in
2016
and
2015
, respectively.
Interest paid by Staples in
2016
totaled
$173 million
, which includes
$130 million
related to financing arrangements associated with the Company's terminated agreement to merge with Office Depot. Interest paid in
2015
and
2014
was
$49 million
and
$51 million
, respectively. There was no interest capitalized in
2016
,
2015
or
2014
.
January 2018 Notes and January 2023 Notes
: In January 2013, the Company issued
$500 million
aggregate principal amount of
2.75%
senior notes due January 2018 (the "January 2018 Notes") and
$500 million
aggregate principal amount of
4.375%
senior notes due January 2023 (the "January 2023 Notes", or collectively “the Notes”), for total net proceeds after the original issue discount and the underwriters' fees of
$991 million
. The Notes were issued with original discounts at
99.727%
and
99.808%
, respectively. The Notes rank equally with all of the Company's other unsecured and unsubordinated indebtedness. The indenture governing the notes contains covenants that will limit the Company's ability to create certain liens and engage in certain sale and leaseback transactions. The indenture does not limit the amount of debt that the Company or any of the Company's subsidiaries may incur. Interest on these Notes is payable in cash on a semi-annual basis on January 12 and July 12 of each year. The interest rate payable on the Notes will be subject to adjustments from time to time if Moody's Investors Service, Inc. or
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Standard & Poor's Ratings Services downgrades (or downgrades and subsequently upgrades) the rating assigned to the Notes. The Company may redeem the Notes at any time at certain redemption prices specified in the indenture governing the Notes. Upon the occurrence of both (a) a change of control of Staples, Inc., as defined in the indenture, and (b) a downgrade of the Notes below an investment grade rating by both of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services within a specified period, the Company will be required to make an offer to purchase the Notes at a price equal to
101%
of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Notes are not guaranteed by any of the Company's subsidiaries.
Revolving Credit Facility:
On November 22, 2016, the Company entered into a new credit agreement (the "November 2021 Revolving Credit Facility") with Bank of America, N.A., as Administrative Agent and the other lending institutions named therein. The November 2021 Revolving Credit Facility replaces the credit agreement dated as of May 31, 2013, which provided for a maximum borrowing of
$1 billion
and was due to expire in May 2018 (the "Prior Agreement"). As of November 22, 2016, no borrowings were outstanding under the Prior Agreement and the Company did not borrow under the November 2021 Revolving Credit Facility during 2016. The November 2021 Revolving Credit Facility provides for a maximum borrowing of
$1.0 billion
, which pursuant to an accordion feature may be increased to
$1.5 billion
upon our request and the agreement of the lenders participating in the increase. Borrowings may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount. Amounts borrowed may be repaid and reborrowed from time to time until November 22, 2021. Borrowings will bear interest at various interest rates depending on the type of borrowing, and will reflect a percentage spread based on our credit rating. The Company will pay a facility fee at rates that range from
0.100%
to
0.250%
per annum depending on its credit rating. The November 2021 Revolving Credit Facility is unsecured and ranks pari passu with the Company's public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The November 2021 Revolving Credit Facility also contains financial covenants that require the Company to maintain a minimum ratio of consolidated EBIT plus rental expense to consolidated total interest expense plus rental expense and a maximum adjusted funded debt to EBITDAR ratio.
Commercial Paper Program:
The Company has a commercial paper program ("Commercial Paper Program") that allows it to issue up to
$1.0 billion
of unsecured commercial paper notes ("Commercial Paper Notes") from time to time. The November 2021 Revolving Credit Facility serves as a back-up to the Commercial Paper Program. Borrowings outstanding under the Company's commercial paper program reduce the borrowing capacity available under the revolving credit facility by a commensurate amount. The Company typically uses proceeds from the Commercial Paper Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Commercial Paper Notes vary, but may not exceed
397 days
from the date of issue. The maximum amount outstanding under the commercial paper program during 2016 was
$188 million
. As of
January 28, 2017
,
no
Commercial Paper Notes were outstanding.
Other Lines of Credit:
The Company has various other lines of credit under which it may borrow a maximum of
$76 million
. At
January 28, 2017
, the Company had outstanding borrowings of
$1 million
, leaving
$75 million
of available credit at that date.
There were no instances of default during
2016
under any of the Company's debt agreements.
Deferred Financing Fees
In connection with the issuance of certain debt instruments, the Company incurred financing fees 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 million
for each of
2016
,
2015
and
2014
.
Note H
—
Fair Value Measurements
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt approximate their carrying values because of their short-term nature. The carrying values of the Company's capital lease and commercial paper obligations approximate fair value.
The following table shows the difference between the financial statement carrying value and fair value of the Company's debt obligations as of
January 28, 2017
and
January 30, 2016
(in millions). The fair values of these notes were determined based on quoted market prices and are classified as Level 1 measurements.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
January 2018 Notes
|
$
|
499
|
|
|
$
|
503
|
|
|
$
|
498
|
|
|
$
|
496
|
|
|
January 2023 Notes
|
497
|
|
|
509
|
|
|
496
|
|
|
488
|
|
From time to time the Company has investments in money market funds that are measured and recorded in the financial statements at fair value on a recurring basis. The fair values are based on quotes received from third-party banks and are classified as Level 1 measurements. As of
January 28, 2017
, the fair value of these investments, which are classified as Cash and cash equivalents in the condensed consolidated balance sheet, was
$111 million
. There were no material money market investments as of
January 30, 2016
.
There are no other material assets or liabilities measured at fair value.
Note I
—
Commitments and Contingencies
Commitments
Staples leases certain retail and support facilities under long-term non-cancelable lease agreements. Most lease agreements contain renewal options and rent escalation clauses and, in some cases, allow termination within a certain number of years with notice and a fixed payment. Certain agreements provide for contingent rental payments based on sales.
Other long-term obligations for continuing operations at
January 28, 2017
include
$50 million
relating to future rent escalation clauses and lease incentives under certain existing operating lease arrangements. These rent obligations are recognized on a straight-line basis over the respective terms of the leases. Future minimum lease commitments due for retail, distribution, fulfillment and support facilities (including restructured facilities) and equipment leases under non-cancelable operating leases are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year:
|
Continuing operations
|
Discontinued operations
|
|
2017
|
$
|
559
|
|
$
|
47
|
|
|
2018
|
442
|
|
37
|
|
|
2019
|
338
|
|
30
|
|
|
2020
|
251
|
|
23
|
|
|
2021
|
176
|
|
16
|
|
|
Thereafter
|
258
|
|
49
|
|
|
|
$
|
2,024
|
|
$
|
202
|
|
The Company also guarantees certain lease obligations of its divested retail business in the United Kingdom - see
Note D
-
Discontinued Operations
for additional information related to these commitments.
Future minimum lease commitments for continuing and discontinued operations exclude the impact of
$28 million
and
$2 million
, respectively, of minimum rentals due under non-cancelable subleases. Rent expense for continuing operations was
$576 million
,
$595 million
and
$657 million
for
2016
,
2015
and
2014
, respectively. Rent expense for discontinued operations was
$78 million
,
$96 million
and
$110 million
for
2016
,
2015
and
2014
, respectively.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As of
January 28, 2017
, Staples had contractual purchase obligations that are not reflected in the Company's consolidated balance sheets totaling
$460 million
for continuing operations and
$6 million
for discontinued operations. Many of the Company's purchase commitments may be canceled by the Company without advance notice or payment and, accordingly, the Company has excluded such commitments from the following schedule. Contracts that may be terminated by the Company without cause or penalty, but that require advance notice for termination, are valued on the basis of an estimate of what the Company would owe under the contract upon providing notice of termination. Expected payments related to such purchase obligations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year:
|
Continuing operations
|
Discontinued operations
|
|
2017
|
$
|
264
|
|
$
|
5
|
|
|
2018
|
71
|
|
1
|
|
|
2019
|
42
|
|
—
|
|
|
2020
|
27
|
|
—
|
|
|
2021
|
24
|
|
—
|
|
|
Thereafter
|
32
|
|
—
|
|
|
|
$
|
460
|
|
$
|
6
|
|
Letters of credit are issued by Staples during the ordinary course of business through major financial institutions as required by certain vendor contracts. As of
January 28, 2017
, Staples had open standby letters of credit totaling
$89 million
.
Contingencies
The Company has investigated, with the assistance of outside experts, a data security incident involving unauthorized access into the computer systems of PNI Digital Media Ltd ("PNI"), a subsidiary of the Company, which the Company acquired in July 2014. PNI, which is based in Vancouver, British Columbia, provides a software platform that enables retailers to sell personalized products such as photo prints, photo books, calendars, business cards, stationery and other similar products. PNI’s customers include a number of major third party retailers, as well as affiliates of the Company. The investigation determined that an unauthorized party entered PNI’s systems and was able to deploy malware on some of PNI’s servers supporting its clients. The malware was designed to capture data that end users input on the photosites. Some of PNI's affected customers have notified certain of their users of a potential compromise of the users' payment card information and/or other personal information. PNI took prompt steps to contain the incident, including disabling the retailer photosites or online payment transactions for a period while the incident was being investigated, and to further enhance the security of its retailer customers' data. To date, the Company has incurred incremental expenses of
$18 million
related to the incident. The expenses reflect professional service fees incurred by the Company, claims by PNI's retailer customers, and litigation settlement amounts. Additional losses and expenses relating to the incident are probable; however, at this stage, the Company does not have sufficient information to reasonably estimate such losses and expenses. The types of losses and expenses that may result from the incident include, without limitation: claims by PNI’s retailer customers, including indemnification claims for losses and damages incurred by them; claims by end-users of PNI’s services, including class action lawsuits that have been filed, and further class action lawsuits that may be filed, in Canada and the United States; investigations and claims by various regulatory authorities in Canada and the United States; investigation costs; remediation costs; and legal fees. The Company will continue to evaluate information as it becomes known and will record an estimate for additional losses or expenses at the time or times when it is both probable that any loss has been incurred and the amount of such loss is reasonably estimable. Such losses may be material to our results of operations and financial condition. The Company maintains network security insurance coverage, which the Company expects would help mitigate the financial impact of the incident.
In 2013 the Company completed the sale of its European Printing Systems Division ("PSD"), recognizing a preliminary loss on disposal of
$81 million
that is subject to the impact of a working capital adjustment to the purchase price. On April 22, 2015, the purchaser commenced litigation in Amsterdam District Court claiming that it was entitled to a purchase price adjustment of €
60 million
. On April 22, 2015, the Company made a payment to the purchaser of approximately €
4 million
(the amount of the purchase price adjustment the Company believed was appropriate) and the purchaser reduced its claim accordingly. The purchaser further reduced its claim to €
52 million
in response to expert reports submitted by the Company in the court case. The court held a hearing on December 1, 2015, and on January 13, 2016, it issued a judgment rejecting the purchaser’s claims in their entirety and awarding costs to the Company. The purchaser filed a notice of appeal on February 15, 2016, which the Company opposed. The Court held a hearing on the appeal on September 14, 2016, and its ruling is pending. If the purchaser prevails on appeal, it could result in an adjustment, which may be material, to the loss we recorded for the transaction.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
In 2012, plaintiff Bobby Dean Nickel filed an employment discrimination lawsuit against the Company and its subsidiary, Staples Contract & Commercial, Inc. The lawsuit alleged that Nickel’s 2011 termination was based on his age (over 40). In August 2013, the trial court denied summary judgment on the age discrimination claim, but granted it as to all other claims. On February 26, 2014, after trial, the jury returned a verdict in plaintiff’s favor, awarding him approximately
$3 million
in compensatory damages and approximately
$22 million
in punitive damages. The Company filed a series of post-trial motions asking the trial court to vacate the jury verdict and order a new trial or, if the verdict is not vacated, to reduce the amount of damages awarded through the process of remittitur. The trial court granted judgment notwithstanding the verdict as to the punitive damages assessed against Staples, Inc., reducing the total judgment to approximately
$16 million
. The trial court also awarded Nickel approximately
$1 million
in attorneys’ fees and costs. The Company filed an appeal with the California Court of Appeal in November 2015 and the matter was heard in April 2016. On May 26, 2016, the Court of Appeal ruled against the Company, and subsequently denied the Company’s Request for Rehearing. On July 5, 2016, Staples filed a Petition for Review with the California Supreme Court. On July 19, 2016, Nickel filed his Answer to the Petition for Review and on July 28, 2016, Staples filed its Reply to Nickel’s Answer to the Petition for Review. The Supreme Court denied the petition for review on August 10, 2016. Staples subsequently paid approximately
$22 million
to satisfy the outstanding judgment, including interest and Nickel's attorney's fees and costs.
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 estimates exposures and establishes reserves for amounts that are probable and can be reasonably estimated. However, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected or differ from the Company’s reserves. The Company does not believe it is reasonably possible that a loss in excess of the amounts recognized in the consolidated financial statements as of
January 28, 2017
would have a material adverse effect on its business, results of operations, financial condition or cash flows.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note J
—
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of Staples' deferred tax assets and liabilities related to continuing operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Deferred income tax assets:
|
|
|
|
|
|
Deferred rent
|
|
$
|
20
|
|
|
$
|
22
|
|
|
Net operating loss carryforwards
|
|
59
|
|
|
70
|
|
|
Capital loss carryforwards
|
|
14
|
|
|
13
|
|
|
Employee benefits
|
|
87
|
|
|
98
|
|
|
Bad debts
|
|
16
|
|
|
18
|
|
|
Inventory
|
|
17
|
|
|
14
|
|
|
Insurance
|
|
32
|
|
|
34
|
|
|
Deferred revenue
|
|
12
|
|
|
11
|
|
|
Depreciation
|
|
22
|
|
|
19
|
|
|
Financing
|
|
1
|
|
|
36
|
|
|
Accrued expenses
|
|
13
|
|
|
20
|
|
|
Store closures
|
|
25
|
|
|
35
|
|
|
Acquisition Costs
|
|
—
|
|
|
20
|
|
|
Other—net
|
|
14
|
|
|
10
|
|
|
Total deferred income tax assets
|
|
332
|
|
|
420
|
|
|
Total valuation allowance
|
|
(85
|
)
|
|
(76
|
)
|
|
Net deferred income tax assets
|
|
$
|
247
|
|
|
$
|
344
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
Intangibles
|
|
$
|
(91
|
)
|
|
$
|
(104
|
)
|
|
Depreciation
|
|
(36
|
)
|
|
(34
|
)
|
|
Other—net
|
|
(5
|
)
|
|
(3
|
)
|
|
Total deferred income tax liabilities
|
|
(132
|
)
|
|
(141
|
)
|
|
Net deferred income tax assets
|
|
$
|
115
|
|
|
$
|
203
|
|
The following table summarizes net deferred income tax assets and liabilities for discontinued operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Net deferred income tax assets
|
|
$
|
—
|
|
|
$
|
7
|
|
|
Net deferred income tax liabilities
|
|
$
|
(2
|
)
|
|
$
|
(22
|
)
|
The deferred tax asset from tax loss carryforwards related to continuing operations of
$59 million
represents approximately
$192 million
of net operating loss carryforwards,
$80 million
of which are subject to expiration beginning in
2017
. The remainder has an indefinite carryforward period.
The valuation allowance increased by
$9 million
during 2016 due to the establishment of valuation allowances in certain foreign jurisdictions, in part due to current year operating losses for which the Company has concluded it is more likely than not a tax benefit will not be realized.
For financial reporting purposes, income from continuing operations before income taxes includes the following components (in millions):
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Pretax income (loss):
|
|
|
|
|
|
|
|
United States
|
|
$
|
(407
|
)
|
|
$
|
463
|
|
|
$
|
545
|
|
|
Foreign
|
|
55
|
|
|
101
|
|
|
(292
|
)
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(352
|
)
|
|
$
|
564
|
|
|
$
|
253
|
|
The provision (benefit) for income taxes related to continuing operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Current tax expense:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(7
|
)
|
|
$
|
54
|
|
|
$
|
117
|
|
|
State
|
|
12
|
|
|
3
|
|
|
36
|
|
|
Foreign
|
|
33
|
|
|
7
|
|
|
14
|
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
52
|
|
|
17
|
|
|
(52
|
)
|
|
State
|
|
5
|
|
|
1
|
|
|
(9
|
)
|
|
Foreign
|
|
12
|
|
|
20
|
|
|
22
|
|
|
Total income tax expense
|
|
$
|
107
|
|
|
$
|
102
|
|
|
$
|
128
|
|
See
Note D
-
Discontinued Operations
for the income and losses from discontinued operations before income taxes and related income taxes reported in 2016, 2015 and
2014
. All pre-tax income presented in discontinued operations is related to foreign operations.
A reconciliation of the federal statutory tax rate to Staples' effective tax rate on income from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
State effective rate, net of federal benefit
|
|
(2.0
|
)
|
|
2.5
|
|
|
(1.7
|
)
|
|
Effect of foreign taxes
|
|
17.8
|
|
|
(12.8
|
)
|
|
(22.1
|
)
|
|
Tax credits
|
|
1.0
|
|
|
(0.5
|
)
|
|
(1.1
|
)
|
|
Changes in uncertain tax positions
|
|
(2.3
|
)
|
|
(8.8
|
)
|
|
(14.4
|
)
|
|
Goodwill impairment
|
|
(73.1
|
)
|
|
—
|
|
|
46.6
|
|
|
Change in valuation allowance
|
|
(2.9
|
)
|
|
1.1
|
|
|
9.8
|
|
|
Other
|
|
(4.0
|
)
|
|
1.6
|
|
|
(1.2
|
)
|
|
Effective tax rate
|
|
(30.5
|
)%
|
|
18.1
|
%
|
|
50.9
|
%
|
The effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. The 2016 and 2014 effective tax rates were unfavorably impacted by goodwill impairment charges that were largely non-deductible (see
Note C
-
Goodwill and Long-Lived Assets
). The 2016, 2015 and 2014 effective tax rates were favorably impacted by changes in uncertain tax positions.
The Company operates in multiple jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. In the Company's opinion, an adequate provision for income taxes has been made for all years subject to audit.
Income tax payments related to consolidated operations were
$71 million
,
$205 million
and
$204 million
during
2016
,
2015
and
2014
, respectively.
As of January 30, 2016, the Company had
$586 million
of undistributed earnings. It is the Company’s intention to indefinitely reinvest a portion of the undistributed earnings outside of the U.S., and for jurisdictions not deemed indefinitely reinvested there would be no incremental tax due upon remittance. Accordingly, deferred income taxes have not been provided for these funds. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation. During 2014, the Company repatriated
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
$127 million
of cash held by a foreign subsidiary, and as a result recorded income tax expense of
$11 million
in 2014 related to the net tax cost in the U.S. stemming from the repatriation.
Uncertain Tax Positions
At
January 28, 2017
, the Company had
$137 million
of gross unrecognized tax benefits, of which
$130 million
, if recognized, would affect the Company's tax rate. At
January 30, 2016
, the Company had
$136 million
of gross unrecognized tax benefits, of which
$127 million
, if recognized, would affect the Company's tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal
2017
.
The following summarizes the activity related to the Company's unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Balance at beginning of fiscal year
|
|
$
|
136
|
|
|
$
|
216
|
|
|
$
|
281
|
|
|
Additions for tax positions related to current year
|
|
30
|
|
|
19
|
|
|
22
|
|
|
Additions for tax positions of prior years
|
|
8
|
|
|
5
|
|
|
36
|
|
|
Reductions for tax positions of prior years
|
|
(8
|
)
|
|
(5
|
)
|
|
(88
|
)
|
|
Reduction for statute of limitations expiration
|
|
(22
|
)
|
|
(69
|
)
|
|
(17
|
)
|
|
Settlements
|
|
(7
|
)
|
|
(30
|
)
|
|
(18
|
)
|
|
Balance at end of fiscal year
|
|
$
|
137
|
|
|
$
|
136
|
|
|
$
|
216
|
|
Staples is subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through
2012
. All material state, local and foreign income tax matters for years through
2002
have been substantially concluded.
Staples' continuing practice is to recognize interest and penalties related to tax matters in income tax expense. The Company recognized interest (benefit) expense and penalties related to income tax matters of consolidated operations of
$6 million
,
$(6) million
,
$2 million
in
2016
,
2015
and
2014
, respectively, which was classified in income tax expense. The Company had
$34 million
and
$28 million
accrued for gross interest and penalties as of
January 28, 2017
and
January 30, 2016
, respectively.
Note K
—
Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity-based employee compensation and benefit plans. In connection with these plans, Staples recognized
$61 million
,
$63 million
and
$64 million
of compensation expense for
2016
,
2015
and
2014
, respectively, of which approximately
$4 million
related to discontinued operations for each year. The total income tax benefit related to stock-based compensation was
$21 million
,
$20 million
,
$18 million
for
2016
,
2015
and
2014
, respectively. As of
January 28, 2017
, Staples had
$66 million
of unamortized stock compensation expense associated with its equity-based plans, which will be expensed over a weighted-average period of
1.5 years
.
Stock Award Plan
Under the 2014 Stock Incentive Plan, the Company may grant restricted stock and restricted stock units (collectively, “Restricted Shares”) and non-qualified stock options to associates. Prior to June 2014, Restricted Shares and non-qualified stock options were granted under the Company's Amended and Restated 2004 Stock Incentive Plan. Shares issued pursuant to restricted stock awards are restricted in that they are not transferable until they vest. Shares underlying awards of restricted stock units are not issued until the units vest. Non-qualified stock options cannot be exercised until they vest. For stock awards with service conditions only, vesting occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are recognized on a straight line basis over the applicable vesting period. For awards that include performance conditions, the Company recognizes compensation expense during the performance period to the extent achievement of the performance condition is deemed probable relative to targeted performance. A change in the Company's estimate of the probable outcome of a performance condition is accounted for in the period of the change by recording a cumulative catch-up adjustment.
Performance Shares
In April 2013, March 2014, March 2015 and April 2016, the Company entered into long-term performance share agreements with certain executives. Each arrangement covers a three year performance period. Payout under these arrangements may range from
25%
to
200%
of target for each performance metric, depending on actual performance. Any award earned based on performance achieved may be increased or decreased by
25%
if the Company's cumulative total shareholder return ("TSR") over the three year performance period is in the top or bottom one-third of the S&P 500 TSR, respectively. Shares earned, if any,
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
will be issued on a fully-vested basis at the conclusion of the three-year performance period only if the grantee is still actively employed by or serving as a consultant to the Company at that time, with certain exceptions for retirement, death, disability, and termination without cause.
For the arrangements entered into in April 2016, vesting is based on cumulative performance over a three year period comprising fiscal years 2016 to 2018, and is
50%
based on achieving certain operating income growth targets and
50%
based on achieving certain return on net assets percentage targets. As of January 28, 2017, the aggregate target number of shares for this award is
0.9 million
, net of forfeitures, with a grant-date fair value of
$9 million
.
For the arrangements entered into in April of 2013 and March of 2014 and March of 2015, vesting for these awards is based on performance achieved in each fiscal year, with performance targets established at the beginning of each year, and is
50%
based on satisfaction of certain sales growth metrics and
50%
based on achievement of certain return on net assets percentage targets.
For each performance period completed as of the end of 2016, the table below shows the target number of shares, the aggregate grant-date fair value, and the percentage of target shares earned based on the extent to which the performance targets were achieved, subject to adjustment based on TSR at the end of the three year performance period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance period
|
|
Award date
|
|
Target number of shares (millions)
|
|
Grant date fair value (millions)
|
|
% of target shares earned
|
|
2016
|
|
March 2015
|
|
0.4
|
|
$3
|
|
50%
|
|
|
March 2014
|
|
0.5
|
|
$4
|
|
|
2015
|
|
March 2015
|
|
0.5
|
|
$7
|
|
78.4%
|
|
|
March 2014
|
|
0.5
|
|
$9
|
|
|
|
April 2013
|
|
0.5
|
|
$8
|
|
|
2014
|
|
March 2014
|
|
0.6
|
|
$7
|
|
87.3%
|
|
|
April 2013
|
|
0.5
|
|
$6
|
|
The three year performance period related to the March 2014 award was complete as of the end of 2016. The shares earned related to this award are expected to be issued in March 2017, and the amount earned based on performance will be reduced by
25%
based on the results of the TSR multiplier.
Upon completion of the three-year performance period related to the April 2013 award, in April 2016, the Company issued a total of
0.8 million
shares on a fully vested basis, which reflects a
25%
reduction related to the TSR multiplier.
Restricted Shares
The following table summarizes activity related to Restricted Shares in
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares (1)
|
|
|
|
Number of
Shares (in millions)
|
|
Weighted-Average
Grant Date Fair
Value Per Share
|
|
January 30, 2016
|
|
7
|
|
|
$
|
13.84
|
|
|
Granted
|
|
7
|
|
|
8.18
|
|
|
Vested
|
|
(3
|
)
|
|
13.41
|
|
|
Canceled
|
|
(2
|
)
|
|
11.78
|
|
|
January 28, 2017
|
|
9
|
|
|
$
|
10.04
|
|
|
|
|
|
(1)
|
Excludes shares issuable under outstanding performance awards
|
The weighted-average grant date fair values per share of Restricted Shares granted during
2016
,
2015
and
2014
were
$8.18
,
$14.68
and
$11.73
, respectively. The total market value of Restricted Shares vested during
2016
,
2015
and
2014
was
$37 million
,
$74 million
and
$54 million
, respectively.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stock Options
The Company did not grant any stock options during
2014
,
2015
or
2016
. Information with respect to stock options granted in 2012 and prior is as follows (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Weighted-Average Remaining Contractual Term in Years
|
|
Aggregate Intrinsic Value (1)
(in millions)
|
|
Outstanding at January 30, 2016
|
|
20
|
|
|
$
|
20.36
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Canceled
|
|
(4
|
)
|
|
20.76
|
|
|
|
|
|
|
Expired
|
|
(2
|
)
|
|
24.52
|
|
|
|
|
|
|
Outstanding at January 28, 2017
|
|
14
|
|
|
$
|
19.67
|
|
|
2.32
|
|
$0
|
|
|
|
|
(1)
|
The intrinsic value of the non-qualified stock options is the amount by which the market value of the underlying stock exceeds the exercise price of an option.
|
There were no options exercised in 2016 and the total intrinsic value of options exercised in
2015
and
2014
was
$1 million
and
$1 million
, respectively. All options are fully vested as of January 28, 2017.
Employee Stock Purchase Plan
Staples offers its associates the opportunity for share ownership pursuant to the Amended and Restated Employee Stock Purchase Plan. U.S. and International associates are able to purchase shares of Staples common stock at
85%
of the market price of the common stock at the end of the offering period through payroll deductions in an amount not to exceed
10%
of an employee’s annual base compensation. During
2016
and
2015
, the Company issued
4 million
and
3 million
shares, respectively, pursuant to this plan.
Shares Available for Issuance
At
January 28, 2017
,
64 million
shares of common stock were reserved for issuance under Staples' 2014 Plan, 2004 Plan, 401(k) Plan and employee stock purchase plan.
Note L
—
Pension and Other Post-Retirement Benefit Plans
The Company has sponsored pension plans that covered certain employees in Europe and the U.S. As noted in
Note D
-
Discontinued Operations
, in February 2017 the Company completed the sale of a controlling interest in its European Operations, and in conjunction with that transaction transferred the assets and liabilities related to the European pension plans to the buyer. As noted in
Note E
-
Sale of Businesses and Assets
, in July 2016 the Company completed the sale of SPS, a component of its North American Delivery segment, and in connection with that transaction during the second half of 2016 it settled the pension obligations and terminated the plan related to this business, resulting in a charge of
$9 million
which is included in
(Loss) gain on sale of businesses and assets, net
in the consolidated statement of income for 2016. Following these transactions, the Company no longer has obligations related to pension plans.
The Company also sponsors an unfunded post-retirement life insurance benefit plan, which provides benefits to eligible U.S. executives based on earnings, years of service and age at termination of employment. In 2016 the Company amended this plan, which had the effect of reducing benefits for certain plan participants. The amendment resulted in a curtailment charge of
$3 million
, which is included in
Selling, general and administrative
expense in the consolidated statement of income for 2016.
Unless otherwise noted, the information contained in this note includes both continuing and discontinued operations. The amounts related to International Plans are included in discontinued operations in the consolidated balance sheet and consolidated statement of income.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents a summary of the total projected benefit obligation, the fair value of plan assets and the associated funded status recorded in the consolidated balance sheet at
January 28, 2017
and
January 30, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
|
|
Projected
Benefit
Obligations
|
|
Fair Value
of Plan
Assets
|
|
Funded
Status
|
|
Projected
Benefit
Obligations
|
|
Fair Value
of Plan
Assets
|
|
Funded
Status
|
|
Overfunded Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International plans
|
|
$
|
(927
|
)
|
|
$
|
978
|
|
|
$
|
51
|
|
|
$
|
(924
|
)
|
|
$
|
969
|
|
|
$
|
45
|
|
|
Underfunded Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(37
|
)
|
|
$
|
27
|
|
|
$
|
(10
|
)
|
|
International plans
|
|
(65
|
)
|
|
37
|
|
|
(28
|
)
|
|
(65
|
)
|
|
37
|
|
|
(28
|
)
|
|
Total Underfunded Plans
|
|
$
|
(65
|
)
|
|
$
|
37
|
|
|
$
|
(28
|
)
|
|
$
|
(102
|
)
|
|
$
|
64
|
|
|
$
|
(38
|
)
|
The following tables present a summary of the total net periodic cost (income) recorded in the Consolidated Statement of Income for
2016
,
2015
and
2014
related to the plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Pension Plans
|
|
Post-retirement
Benefit Plan
|
|
|
|
U.S. Plans
|
|
International Plans
|
|
Total
|
|
Total
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
Interest cost
|
|
2
|
|
|
21
|
|
|
23
|
|
|
3
|
|
|
Expected return on plan assets
|
|
(2
|
)
|
|
(48
|
)
|
|
(50
|
)
|
|
—
|
|
|
Amortization of unrecognized losses and prior service costs
|
|
1
|
|
|
14
|
|
|
15
|
|
|
2
|
|
|
Settlement or curtailment loss
|
|
9
|
|
|
—
|
|
|
9
|
|
|
3
|
|
|
Total cost (benefit)
|
|
$
|
10
|
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Pension Plans
|
|
Post-retirement
Benefit Plan
|
|
|
|
U.S. Plans
|
|
International Plans
|
|
Total
|
|
Total
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
2
|
|
|
Interest cost
|
|
2
|
|
|
15
|
|
|
17
|
|
|
3
|
|
|
Expected return on plan assets
|
|
(2
|
)
|
|
(50
|
)
|
|
(52
|
)
|
|
—
|
|
|
Amortization of unrecognized losses and prior service costs
|
|
1
|
|
|
13
|
|
|
14
|
|
|
3
|
|
|
Total cost (benefit)
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
Pension Plans
|
|
Post-retirement
Benefit Plan
|
|
|
|
U.S. Plans
|
|
International Plans
|
|
Total
|
|
Total
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
1
|
|
|
Interest cost
|
|
2
|
|
|
29
|
|
|
31
|
|
|
2
|
|
|
Expected return on plan assets
|
|
(2
|
)
|
|
(51
|
)
|
|
(53
|
)
|
|
—
|
|
|
Amortization of unrecognized losses and prior service costs
|
|
—
|
|
|
10
|
|
|
10
|
|
|
2
|
|
|
Settlement loss
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Total cost (benefit)
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
5
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents the changes in benefit obligations during
2015
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Post-retirement
Benefit Plans
|
|
|
|
U.S. Plans
|
|
International
Plans
|
|
Total
|
|
Total
|
|
Projected benefit obligation at January 31, 2015
|
|
$
|
41
|
|
|
$
|
1,169
|
|
|
$
|
1,210
|
|
|
$
|
59
|
|
|
Service cost
|
|
—
|
|
|
19
|
|
|
19
|
|
|
2
|
|
|
Interest cost
|
|
2
|
|
|
15
|
|
|
17
|
|
|
3
|
|
|
Plan participants' contributions
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
Actuarial gains
|
|
(4
|
)
|
|
(129
|
)
|
|
(133
|
)
|
|
(3
|
)
|
|
Benefits paid
|
|
(2
|
)
|
|
(44
|
)
|
|
(46
|
)
|
|
—
|
|
|
Other
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
Currency translation adjustments
|
|
—
|
|
|
(41
|
)
|
|
(41
|
)
|
|
—
|
|
|
Projected benefit obligation at January 30, 2016
|
|
$
|
37
|
|
|
$
|
989
|
|
|
$
|
1,026
|
|
|
$
|
61
|
|
|
Service cost
|
|
—
|
|
|
11
|
|
|
11
|
|
|
2
|
|
|
Interest cost
|
|
2
|
|
|
21
|
|
|
23
|
|
|
3
|
|
|
Actuarial losses (gains)
|
|
—
|
|
|
43
|
|
|
43
|
|
|
(13
|
)
|
|
Benefits paid
|
|
(40
|
)
|
|
(43
|
)
|
|
(83
|
)
|
|
—
|
|
|
Negative amendment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
Settlements and curtailments
|
|
1
|
|
|
—
|
|
|
1
|
|
|
(4
|
)
|
|
Currency translation adjustments
|
|
—
|
|
|
(28
|
)
|
|
(28
|
)
|
|
—
|
|
|
Projected benefit obligation at January 28, 2017
|
|
$
|
—
|
|
|
$
|
993
|
|
|
$
|
993
|
|
|
$
|
42
|
|
The accumulated benefit obligation for the International Plans at
January 28, 2017
was
$993 million
. The accumulated benefit obligation for the U.S. Plans and International Plans at
January 30, 2016
was
$37 million
and
$970 million
, respectively. The accumulated benefit obligation for the post-retirement benefit obligation was
$42 million
and
$61 million
at
January 28, 2017
and
January 30, 2016
, respectively.
The following table presents the changes in pension plan assets for each of the defined benefit pension plans during
2015
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
International
Plans
|
|
Total
|
|
Fair value of plan assets at January 31, 2015
|
|
$
|
31
|
|
|
$
|
1,106
|
|
|
$
|
1,137
|
|
|
Actual return on plan assets
|
|
(2
|
)
|
|
(28
|
)
|
|
(30
|
)
|
|
Employer's contributions
|
|
—
|
|
|
10
|
|
|
10
|
|
|
Plan participants' contributions
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Benefits paid
|
|
(2
|
)
|
|
(44
|
)
|
|
(46
|
)
|
|
Currency translation adjustments
|
|
—
|
|
|
(39
|
)
|
|
(39
|
)
|
|
Fair value of plan assets at January 30, 2016
|
|
$
|
27
|
|
|
$
|
1,006
|
|
|
$
|
1,033
|
|
|
Actual return on plan assets
|
|
2
|
|
|
70
|
|
|
72
|
|
|
Employer's contributions
|
|
11
|
|
|
11
|
|
|
22
|
|
|
Benefits paid
|
|
(40
|
)
|
|
(43
|
)
|
|
(83
|
)
|
|
Currency translation adjustments
|
|
—
|
|
|
(29
|
)
|
|
(29
|
)
|
|
Fair value of plan assets at January 28, 2017
|
|
$
|
—
|
|
|
$
|
1,015
|
|
|
$
|
1,015
|
|
Amounts recognized in the consolidated balance sheet consist of the following (in millions):
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
|
|
International
Pension Plans
|
|
|
Post-Retirement Benefit Plans
|
|
Prepaid benefit cost (included in other assets)
|
|
$
|
51
|
|
|
|
$
|
—
|
|
|
Accrued benefit liability (included in other long-term obligations)
|
|
(28
|
)
|
|
|
(42
|
)
|
|
Accumulated other comprehensive loss
|
|
291
|
|
|
|
1
|
|
|
Net amount recognized
|
|
$
|
314
|
|
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
|
|
Pension Plans
|
|
Post-retirement
Benefit Plans
|
|
|
|
|
|
|
U.S. Plans
|
|
International
Plans
|
|
Total
|
|
Total
|
|
Prepaid benefit cost (included in other assets)
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
Accrued benefit liability (included in other long-term obligations)
|
|
(10
|
)
|
|
(28
|
)
|
|
(38
|
)
|
|
(61
|
)
|
|
Accumulated other comprehensive loss
|
|
10
|
|
|
283
|
|
|
293
|
|
|
31
|
|
|
Net amount recognized
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
(30
|
)
|
Amounts recognized in accumulated other comprehensive loss ("AOCL") are comprised of actuarial losses and prior service costs. The amount recorded in AOCL as of January 28, 2017 related to International Plans was written off upon closing of the sale of the Company's European operations in February 2017, and will be reflected in the loss on sale to be recognized in the first quarter of 2017.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Assumptions Used to Determine Plan Financial Information
The valuation of benefit obligations and net periodic pension and post-retirement benefit cost uses participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
The following table presents the assumptions used to measure the net periodic cost and the year-end benefit obligations for the defined benefit pension and post-retirement benefit plans for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Pension Plans
|
|
Post-retirement Benefit Plan
|
|
|
|
U.S.
Plans
|
|
International
Plans
|
|
|
|
|
|
Weighted-average assumptions used to measure net periodic pension cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
4.5
|
%
|
|
1.9
|
%
|
|
4.4
|
%
|
|
Expected return on plan assets
|
|
6.0
|
%
|
|
4.4
|
%
|
|
—
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
1.9
|
%
|
|
—
|
%
|
|
Weighted-average assumptions used to measure benefit obligations at year-end:
|
|
|
|
|
|
|
|
Discount rate
|
|
—
|
%
|
|
1.5
|
%
|
|
4.4
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
1.0
|
%
|
|
—
|
%
|
|
Rate of pension increase
|
|
—
|
%
|
|
1.7
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
Pension Plans
|
|
Post-retirement Benefit Plan
|
|
|
|
U.S.
Plans
|
|
International
Plans
|
|
|
|
|
|
Weighted-average assumptions used to measure net periodic pension cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
3.8
|
%
|
|
1.2
|
%
|
|
4.6
|
%
|
|
Expected return on plan assets
|
|
6.0
|
%
|
|
4.4
|
%
|
|
—
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
1.8
|
%
|
|
3.5
|
%
|
|
Weighted-average assumptions used to measure benefit obligations at year-end:
|
|
|
|
|
|
|
|
Discount rate
|
|
4.5
|
%
|
|
1.8
|
%
|
|
4.6
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
1.8
|
%
|
|
3.5
|
%
|
|
Rate of pension increase
|
|
—
|
%
|
|
1.0
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
Pension Plans
|
|
Post-retirement Benefit Plan
|
|
|
|
U.S.
Plans
|
|
International
Plans
|
|
|
|
|
|
|
Weighted-average assumptions used to measure net periodic pension cost:
|
|
|
|
|
|
|
|
Discount rate
|
|
4.8
|
%
|
|
3.0
|
%
|
|
4.1
|
%
|
|
Expected return on plan assets
|
|
6.0
|
%
|
|
4.7
|
%
|
|
—
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
1.1
|
%
|
|
2.5
|
%
|
|
Weighted-average assumptions used to measure benefit obligations at year-end:
|
|
|
|
|
|
|
|
Discount rate
|
|
3.8
|
%
|
|
1.3
|
%
|
|
4.1
|
%
|
|
Rate of compensation increase
|
|
—
|
%
|
|
2.0
|
%
|
|
2.5
|
%
|
|
Rate of pension increase
|
|
—
|
%
|
|
1.1
|
%
|
|
—
|
%
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table shows the effect on pension obligations at
January 28, 2017
of a change in discount rate and other assumptions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Discount Rate
|
|
|
|
(0.25)%
|
|
No change
|
|
0.25%
|
|
Change in rate of compensation increase:
|
|
|
|
|
|
|
|
(0.25)%
|
|
$
|
37
|
|
|
$
|
(1
|
)
|
|
$
|
(36
|
)
|
|
No change
|
|
38
|
|
|
—
|
|
|
(35
|
)
|
|
0.25%
|
|
39
|
|
|
1
|
|
|
(34
|
)
|
|
Change in rate of pension increase:
|
|
|
|
|
|
|
|
(0.25)%
|
|
$
|
1
|
|
|
$
|
(35
|
)
|
|
$
|
(68
|
)
|
|
No change
|
|
38
|
|
|
—
|
|
|
(35
|
)
|
|
0.25%
|
|
77
|
|
|
37
|
|
|
(1
|
)
|
The discount rate used is the interest rate on high quality (AA rated) corporate bonds that have a maturity approximating the term of the related obligations. In estimating the expected return on plan assets, appropriate consideration is taken into account of the historical performance for the major asset classes held, or anticipated to be held, by the applicable pension funds and of current forecasts of future rates of return for those asset classes.
Staples' investment strategy for pension plan assets was to seek a competitive rate of return relative to an appropriate level of risk depending on the funded status of each plan. The majority of the plans' investment managers employed active investment management strategies with the goal of outperforming the broad markets in which they invest. Risk management practices included diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. A portion of the currency risk related to investments in equity securities, real estate and debt securities was hedged.
The target allocation reflected a risk/return profile Staples deemed appropriate relative to each plan's liability structure and return goals. Staples conducted periodic asset-liability studies for the plan assets in order to model various potential asset allocations in comparison to each plan's forecasted liabilities and liquidity needs.
Outside the United States, asset allocation decisions were typically made by an independent board of trustees. As in the U.S., investment objectives were designed to generate returns that enable the plan to meet its future obligations. In some countries local regulations require adjustments in asset allocation, typically leading to a higher percentage in fixed income than would otherwise be deployed. Staples acted in a consulting and governance role via its board representatives in reviewing investment strategy, with final decisions on asset allocation and investment managers made by local trustees.
The Company's pension plans' actual and target asset allocations at
January 28, 2017
and
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Plans
|
|
|
|
Actual
|
|
Target
|
|
|
Asset allocation:
|
|
|
|
|
|
|
Equity securities
|
|
26
|
%
|
|
25
|
%
|
|
|
Debt securities
|
|
67
|
%
|
|
62
|
%
|
|
|
Real estate
|
|
6
|
%
|
|
8
|
%
|
|
|
Cash
|
|
—
|
%
|
|
—
|
%
|
|
|
Other
|
|
1
|
%
|
|
5
|
%
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
|
|
Actual
|
|
Target
|
|
|
|
U.S.
Plans
|
|
International
Plans
|
|
Total
|
|
U.S.
Plans
|
|
International
Plans
|
|
Total
|
|
Asset allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
48
|
%
|
|
26
|
%
|
|
27
|
%
|
|
50
|
%
|
|
26
|
%
|
|
26
|
%
|
|
Debt securities
|
|
49
|
%
|
|
62
|
%
|
|
62
|
%
|
|
50
|
%
|
|
62
|
%
|
|
62
|
%
|
|
Real estate
|
|
3
|
%
|
|
8
|
%
|
|
7
|
%
|
|
—
|
%
|
|
8
|
%
|
|
8
|
%
|
|
Cash
|
|
—
|
%
|
|
2
|
%
|
|
2
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Other
|
|
—
|
%
|
|
2
|
%
|
|
2
|
%
|
|
—
|
%
|
|
4
|
%
|
|
4
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Information on Fair Value of Plan Assets
The fair values of the Company's pension plan assets at
January 28, 2017
and
January 30, 2016
by asset category are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
|
|
International Plans
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Unobservable Inputs
|
|
Asset Category:
|
|
Fair Market
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Equity securities
(1)
|
|
$
|
263
|
|
|
$
|
209
|
|
|
$
|
40
|
|
|
$
|
14
|
|
|
Debt securities
(2)
|
|
680
|
|
|
400
|
|
|
240
|
|
|
40
|
|
|
Real estate
(3)
|
|
64
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
Cash
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
6
|
|
|
12
|
|
|
(6
|
)
|
|
—
|
|
|
Total
|
|
$
|
1,015
|
|
|
$
|
687
|
|
|
$
|
274
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
|
|
U.S. Pension Plans
|
|
International Plans
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Unobservable Inputs
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Unobservable Inputs
|
|
Asset Category:
|
|
Fair Market
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Market
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Equity securities
(1)
|
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
264
|
|
|
$
|
209
|
|
|
$
|
37
|
|
|
$
|
18
|
|
|
Debt securities
(2)
|
|
13
|
|
|
5
|
|
|
—
|
|
|
8
|
|
|
627
|
|
|
412
|
|
|
211
|
|
|
4
|
|
|
Real estate
(3)
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
74
|
|
|
72
|
|
|
2
|
|
|
—
|
|
|
Cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
13
|
|
|
12
|
|
|
—
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
Total
|
|
$
|
27
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
1,006
|
|
|
$
|
706
|
|
|
$
|
262
|
|
|
$
|
38
|
|
|
|
|
|
(1)
|
This category includes investments in equity securities of large, small and medium sized companies in the U.S. and in foreign companies, including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. For securities with unobservable inputs, the value is based on audited statements for the underlying fund.
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
|
|
|
|
(2)
|
This category includes investments in investment grade fixed income instrument, U.S. dollar denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. For securities with unobservable inputs, the value is based on discounted future cash flows.
|
|
|
|
|
(3)
|
This category includes investments in mortgage-backed and asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
|
The change in the fair value for the pension assets valued using significant unobservable inputs (Level 3) was due to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
International Plans
|
|
Balance at January 30, 2016
|
$
|
8
|
|
|
$
|
38
|
|
|
Actual return on plan assets still held at the reporting date
|
—
|
|
|
16
|
|
|
Purchases, sales and settlements
|
(8
|
)
|
|
—
|
|
|
Balance at January 28, 2017
|
$
|
—
|
|
|
$
|
54
|
|
Expected Benefit Payments and Contributions
The following table presents the expected benefit payments to pension plan participants for the next five years, and the aggregate for the following five years (in millions):
|
|
|
|
|
|
|
|
|
International
Pension Plans
|
|
2017
|
$
|
41
|
|
|
2018
|
41
|
|
|
2019
|
40
|
|
|
2020
|
40
|
|
|
2021
|
40
|
|
|
2022-2026
|
195
|
|
These payments have been estimated based on the same assumptions used to measure the plans' projected benefit obligation at
January 28, 2017
and include benefits attributable to estimated future compensation increases for the pension plans.
The
2017
expected benefit payments to plan participants not covered by the respective plan assets (that is, underfunded plans) represent a component of other long-term obligations in the consolidated balance sheet.
There are no expected benefit payments and contributions associated with the other post-retirement benefit plans.
Employees' 401(k) Savings Plan and Other Defined Contribution Plans
Staples' Employees' 401(k) Savings Plan (the "401(k) Plan") is available to all United States based employees of Staples who meet minimum age and length of service requirements. Contributions by the Company to the 401(k) Plan are made in cash. Contributions made prior to January 1, 2017 are subject to pro-rata vesting over a five year period. Effective January 1, 2017, contributions are subject to a three year cliff vest.
The Company's Supplemental Executive Retirement Plan (the "SERP Plan"), which is similar in certain respects to the 401(k) Plan, is available to certain Company executives and other highly compensated employees, whose contributions to the 401(k) Plan are limited, and allows such individuals to supplement their contributions to the 401(k) Plan by making pre-tax contributions to the SERP Plan. Company contributions to the SERP Plan are based on a matching formula and vest ratably over a five-year period. Other income (expense) in the consolidated statement of income includes a gain of
$14 million
in
2016
and a loss of
$9 million
in
2015
related to investments associated with the SERP, with corresponding and offsetting amounts reflected in compensation expense in selling, general and administrative expense in the consolidated statement of income.
The expense associated with the Company's match for the Staples 401(k) Savings Plan and for contributions related to certain foreign defined contribution plans for
2016
,
2015
and
2014
was
$36 million
,
$37 million
and
$40 million
, respectively.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note M
-
Accumulated Other Comprehensive Loss
The following table details the changes in accumulated other comprehensive loss ("AOCL") for
2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Deferred Benefit Costs
|
|
Accumulated Other Comprehensive Loss
|
|
Balance at February 1, 2014
|
|
$
|
(255
|
)
|
|
$
|
(252
|
)
|
|
$
|
(507
|
)
|
|
Foreign currency translation adjustment
|
|
(403
|
)
|
|
—
|
|
|
(403
|
)
|
|
Deferred pension and other post-retirement benefit costs (net of taxes of $18)
|
|
—
|
|
|
(138
|
)
|
|
(138
|
)
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
Release of cumulative translation adjustments to earnings upon disposal of foreign businesses (net of taxes of $0)
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Amortization of deferred benefit costs (net of taxes of $0)
|
|
—
|
|
|
9
|
|
|
9
|
|
|
Balance at January 31, 2015
|
|
$
|
(660
|
)
|
|
$
|
(381
|
)
|
|
$
|
(1,041
|
)
|
|
Foreign currency translation adjustment
|
|
(132
|
)
|
|
—
|
|
|
(132
|
)
|
|
Deferred pension and other post-retirement benefit costs (net of taxes of $11)
|
|
—
|
|
|
40
|
|
|
40
|
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
Amortization of deferred benefit costs (net of taxes of $0)
|
|
—
|
|
|
17
|
|
|
17
|
|
|
Balance at January 30, 2016
|
|
$
|
(792
|
)
|
|
$
|
(324
|
)
|
|
$
|
(1,116
|
)
|
|
Foreign currency translation adjustment
|
|
25
|
|
|
—
|
|
|
25
|
|
|
Deferred pension and other post-retirement benefit costs (net of taxes of $8)
|
|
—
|
|
|
(8
|
)
|
|
(8
|
)
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
Release of cumulative translation adjustments to earnings upon disposal of foreign businesses (net of taxes of $0)
|
|
6
|
|
|
—
|
|
|
6
|
|
|
Settlement of pension liability (net of taxes of $6)
|
|
—
|
|
|
9
|
|
|
9
|
|
|
Curtailment of post-retirement benefit plan (net of taxes of $8)
|
|
—
|
|
|
14
|
|
|
14
|
|
|
Amortization of deferred benefit costs (net of taxes of $2)
|
|
—
|
|
|
17
|
|
|
17
|
|
|
Balance at January 28, 2017
|
|
$
|
(761
|
)
|
|
$
|
(292
|
)
|
|
$
|
(1,053
|
)
|
The following table details the line items in the consolidated statements of income affected by the reclassification adjustments
during
2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCL
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Selling, general and administrative
|
|
$
|
9
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
Loss on sale of businesses, net
|
|
9
|
|
|
—
|
|
|
—
|
|
|
Income (loss) before tax
|
|
(18
|
)
|
|
(4
|
)
|
|
(2
|
)
|
|
Income tax benefit
|
|
(7
|
)
|
|
—
|
|
|
(1
|
)
|
|
Income (loss) from continuing operations
|
|
(11
|
)
|
|
(4
|
)
|
|
(1
|
)
|
|
Income (loss) from discontinued operations
|
|
(6
|
)
|
|
(13
|
)
|
|
(6
|
)
|
|
Net income (loss)
|
|
$
|
(17
|
)
|
|
$
|
(17
|
)
|
|
$
|
(7
|
)
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note N
—
Computation of Earnings per Common Share
The computation of basic and diluted earnings per share for
2016
,
2015
and
2014
is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
$
|
(459
|
)
|
|
$
|
462
|
|
|
$
|
125
|
|
|
(Loss) income from discontinued operations
|
(1,038
|
)
|
|
(83
|
)
|
|
10
|
|
|
Net (loss) income
|
$
|
(1,497
|
)
|
|
$
|
379
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
649
|
|
|
642
|
|
|
641
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Employee stock options and restricted shares (including performance-based awards)
|
—
|
|
|
5
|
|
|
5
|
|
|
Weighted-average common shares outstanding assuming dilution
|
649
|
|
|
647
|
|
|
646
|
|
|
|
|
|
|
|
|
|
Basic Earnings per share
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.71
|
)
|
|
$
|
0.71
|
|
|
$
|
0.19
|
|
|
Discontinued operations
|
(1.60
|
)
|
|
(0.12
|
)
|
|
0.02
|
|
|
Consolidated operations
|
$
|
(2.31
|
)
|
|
$
|
0.59
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.71
|
)
|
|
$
|
0.71
|
|
|
$
|
0.19
|
|
|
Discontinued operations
|
(1.60
|
)
|
|
(0.12
|
)
|
|
0.02
|
|
|
Consolidated operations
|
$
|
(2.31
|
)
|
|
$
|
0.59
|
|
|
$
|
0.21
|
|
For
2016
,
2015
and
2014
, approximately
29 million
,
20 million
and
30 million
equity instruments, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
Note O
—
Segment Reporting
The Company changed its reportable segments in the fourth quarter of 2016 as a result of an organizational realignment related to its 20/20 strategic plan. The Company now has
two
reportable segments: North American Delivery and North American Retail. North American Delivery consists of the U.S. and Canadian businesses that sell and deliver products and services directly to businesses and includes Staples Business Advantage, Quill.com, Staples.com and Staples.ca. The North American Retail segment comprises the Company's retail store operations in the U.S. and Canada. The Company's segment information for 2015 and 2014 has been revised to reflect this change in the Company's reportable segments.
As a result of reporting its European businesses as discontinued operations (see
Note D
-
Discontinued Operations
), the Company will no longer report an International Operations segment. The Company's operations in Australia, Asia, and South America are included in "Other" in the tables below.
Staples' North American Delivery and North American Retail segments are managed separately because the way they sell and market products is different and the classes of customers they service are different.
Staples evaluates performance and allocates resources based on profit or loss from operations before goodwill and long-lived asset impairment charges, restructuring charges, accelerated depreciation and inventory write-downs associated with exit or disposal activities, merger-related costs, litigation costs, stock-based compensation, income or loss associated with the Company's supplemental executive retirement plan, interest and other expense, costs related to the previously announced PNI data security
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
incident and non-recurring items, ("business unit income"). Intersegment sales and transfers are recorded at Staples' cost; therefore, there is no intercompany profit or loss recognized on these transactions.
Asset information by reportable segment has not been presented, since this information is not regularly reviewed by the Company's chief operating decision maker.
The following is a summary of sales, business unit income, and depreciation and amortization expense by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Sales:
|
|
|
|
|
|
|
|
North American Delivery
|
|
$
|
10,636
|
|
|
$
|
10,731
|
|
|
$
|
10,664
|
|
|
North American Retail
|
|
6,662
|
|
|
7,169
|
|
|
8,055
|
|
|
Other
|
|
949
|
|
|
864
|
|
|
965
|
|
|
Total sales
|
|
$
|
18,247
|
|
|
$
|
18,764
|
|
|
$
|
19,684
|
|
|
Business Unit Income (Loss):
|
|
|
|
|
|
|
|
North American Delivery
|
|
$
|
672
|
|
|
$
|
621
|
|
|
$
|
595
|
|
|
North American Retail
|
|
317
|
|
|
379
|
|
|
432
|
|
|
Other
|
|
(11
|
)
|
|
(16
|
)
|
|
(35
|
)
|
|
Total business unit income
|
|
$
|
978
|
|
|
$
|
984
|
|
|
$
|
992
|
|
|
Depreciation & Amortization:
|
|
|
|
|
|
|
|
North American Delivery
|
|
$
|
189
|
|
|
$
|
185
|
|
|
$
|
173
|
|
|
North American Retail
|
|
178
|
|
|
183
|
|
|
184
|
|
|
Other
|
|
21
|
|
|
28
|
|
|
33
|
|
|
Total segment depreciation & amortization
|
|
$
|
388
|
|
|
$
|
396
|
|
|
$
|
390
|
|
|
Accelerated depreciation related to restructuring activities
|
|
—
|
|
|
3
|
|
|
8
|
|
|
Total depreciation & amortization
|
|
$
|
388
|
|
|
$
|
399
|
|
|
$
|
398
|
|
The following is a reconciliation of total business unit income to (loss) income from continuing operations before income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Total business unit income
|
|
$
|
978
|
|
|
$
|
984
|
|
|
$
|
992
|
|
|
Unallocated expense, net
(1)
|
|
(73
|
)
|
|
(49
|
)
|
|
(64
|
)
|
|
Impairment of goodwill and long-lived assets
|
|
(783
|
)
|
|
(37
|
)
|
|
(469
|
)
|
|
(Loss) gain related to sale of businesses and assets, net
|
|
(55
|
)
|
|
(5
|
)
|
|
29
|
|
|
Restructuring charges and costs related to strategic plans
|
|
(45
|
)
|
|
(105
|
)
|
|
(158
|
)
|
|
Interest and other expense, net
|
|
(88
|
)
|
|
(149
|
)
|
|
(43
|
)
|
|
Merger-related costs
|
|
(272
|
)
|
|
(53
|
)
|
|
—
|
|
|
Litigation costs
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
Inventory write-downs
|
|
—
|
|
|
(1
|
)
|
|
(26
|
)
|
|
Accelerated depreciation
|
|
—
|
|
|
(3
|
)
|
|
(8
|
)
|
|
PNI data security incident costs
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(352
|
)
|
|
$
|
564
|
|
|
$
|
253
|
|
(1) Unallocated expense includes stock-based compensation and income or loss associated with the Company's supplemental executive retirement plan.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table shows the Company's sales by each major category as a percentage of total sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Core office supplies
|
|
24.9
|
%
|
|
24.6
|
%
|
|
25.6
|
%
|
|
Ink and toner
|
|
19.8
|
%
|
|
20.6
|
%
|
|
20.0
|
%
|
|
Business technology
|
|
13.0
|
%
|
|
13.5
|
%
|
|
14.3
|
%
|
|
Paper
|
|
9.0
|
%
|
|
9.1
|
%
|
|
9.2
|
%
|
|
Facilities and breakroom
|
|
11.6
|
%
|
|
10.6
|
%
|
|
10.0
|
%
|
|
Computers and mobility
|
|
6.1
|
%
|
|
6.4
|
%
|
|
6.3
|
%
|
|
Services
|
|
9.2
|
%
|
|
8.9
|
%
|
|
8.6
|
%
|
|
Office furniture and chairs
|
|
6.4
|
%
|
|
6.3
|
%
|
|
6.0
|
%
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Geographic Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Sales:
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,974
|
|
|
$
|
15,567
|
|
|
$
|
16,022
|
|
|
Canada
|
|
2,324
|
|
|
2,333
|
|
|
2,697
|
|
|
Other International
|
|
949
|
|
|
864
|
|
|
965
|
|
|
Total sales
|
|
$
|
18,247
|
|
|
$
|
18,764
|
|
|
$
|
19,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
976
|
|
|
$
|
1,109
|
|
|
$
|
1,172
|
|
|
Canada
|
|
145
|
|
|
144
|
|
|
167
|
|
|
Other International
|
|
26
|
|
|
33
|
|
|
14
|
|
|
Total long-lived assets
|
|
$
|
1,147
|
|
|
$
|
1,286
|
|
|
$
|
1,353
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note P
—
Quarterly Summary (Unaudited)
The following table summarizes quarterly information for
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
(1)
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal Year Ended January 28, 2017
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,570
|
|
|
$
|
4,274
|
|
|
$
|
4,842
|
|
|
$
|
4,560
|
|
|
Gross profit
|
|
1,152
|
|
|
1,069
|
|
|
1,303
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
56
|
|
|
$
|
(108
|
)
|
|
$
|
207
|
|
|
$
|
(615
|
)
|
|
Loss from discontinued operations, net of income taxes
|
|
(15
|
)
|
|
(658
|
)
|
|
(28
|
)
|
|
(337
|
)
|
|
Consolidated net income (loss)
|
|
$
|
41
|
|
|
$
|
(766
|
)
|
|
$
|
179
|
|
|
$
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.94
|
)
|
|
Discontinued operations
|
|
$
|
(0.03
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.52
|
)
|
|
Consolidated operations
|
|
$
|
0.06
|
|
|
$
|
(1.18
|
)
|
|
$
|
0.28
|
|
|
$
|
(1.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.94
|
)
|
|
Discontinued operations
|
|
$
|
(0.03
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.52
|
)
|
|
Consolidated operations
|
|
$
|
0.06
|
|
|
$
|
(1.18
|
)
|
|
$
|
0.27
|
|
|
$
|
(1.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal Year Ended January 30, 2016
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
4,684
|
|
|
$
|
4,387
|
|
|
$
|
4,998
|
|
|
$
|
4,695
|
|
|
Gross profit
|
|
1,193
|
|
|
1,126
|
|
|
1,362
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
67
|
|
|
62
|
|
|
203
|
|
|
130
|
|
|
Loss from discontinued operations, net of income taxes
|
|
(8
|
)
|
|
(26
|
)
|
|
(5
|
)
|
|
(44
|
)
|
|
Consolidated net income
|
|
$
|
59
|
|
|
$
|
36
|
|
|
$
|
198
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.32
|
|
|
$
|
0.20
|
|
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
Consolidated operations
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.31
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per common share:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.31
|
|
|
$
|
0.20
|
|
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
—
|
|
|
$
|
(0.07
|
)
|
|
Consolidated operations
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.31
|
|
|
$
|
0.13
|
|
(1) The sum of the quarterly amounts may not tie to the full year amounts due to rounding.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The table below shows certain pretax items of income or expense included in Income (loss) from continuing operations for each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
(1)
|
|
|
|
|
|
Fiscal Year Ended January 28, 2017
|
|
Footnote Reference
|
|
Description
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Note C
|
|
Impairment of goodwill
|
|
—
|
|
|
—
|
|
|
—
|
|
|
749
|
|
|
Note C
|
|
Impairment of long-lived assets
|
|
—
|
|
|
15
|
|
|
2
|
|
|
17
|
|
|
Note B
|
|
Costs related to restructuring and strategic plans
|
|
11
|
|
|
6
|
|
|
6
|
|
|
23
|
|
|
Note E
|
|
Loss on sale of businesses and assets, net
|
|
32
|
|
|
16
|
|
|
2
|
|
|
5
|
|
|
Note Q
|
|
Merger-related costs
|
|
52
|
|
|
283
|
|
|
—
|
|
|
—
|
|
|
Note I
|
|
Litigation
|
|
—
|
|
|
16
|
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
(1)
|
|
|
|
|
|
Fiscal Year Ended January 30, 2016
|
|
Footnote Reference
|
|
Description
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Note Q
|
|
Merger-related costs
|
|
15
|
|
|
34
|
|
|
40
|
|
|
58
|
|
|
Note B
|
|
Restructuring charges
|
|
39
|
|
|
15
|
|
|
14
|
|
|
37
|
|
|
Note B
|
|
Accelerated Depreciation
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Note C
|
|
Impairment of long-lived assets
|
|
22
|
|
|
1
|
|
|
2
|
|
|
11
|
|
|
Note I
|
|
PNI data security incident costs
|
|
—
|
|
|
—
|
|
|
3
|
|
|
16
|
|
|
Note E
|
|
(Gain) loss on sale of assets, net
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
7
|
|
|
Note B
|
|
Inventory write-downs
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
(1) The sum of the quarterly amounts may not tie to the full year amounts due to rounding.
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note Q
—
Termination of Merger Agreement with Office Depot
On February 4, 2015, Staples announced that it had signed a definitive agreement to acquire Office Depot, a global supplier of office products, services and solutions for the workplace. On December 7, 2015, the U.S. Federal Trade Commission and Canadian Commissioner of Competition each filed lawsuits against the Company and Office Depot, seeking to block the proposed merger and prevent the acquisition from closing. On May 10, 2016, the U.S. District Court for the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction against the proposed acquisition, and as a result Staples and Office Depot terminated the merger agreement on May 16, 2016. Per the terms of the merger agreement, on May 19, 2016 Staples paid Office Depot a
$250 million
break-up fee.
In connection with the termination of the merger agreement, Staples also terminated the previously announced agreement to sell customer contracts representing more than
$550 million
of revenue and related assets to Essendant Inc.
In 2016 and 2015, the Company incurred expenses of
$24 million
and
$53 million
in connection with the transaction, primarily related to professional services associated with seeking regulatory clearances. Of the expenses incurred in 2016,
$21 million
were included in selling, general and administrative expense and
$3 million
were included in discontinued operations in the consolidated statements of income. All of the expenses incurred in 2015 were included in selling, general and administrative expenses. The Company also incurred fees and interest related to term loan financing for the transaction, as discussed below.
Transaction financing
In connection with the Company's proposed acquisition of Office Depot, during 2015 Staples obtained commitments for a
5
-year
$3 billion
asset-based revolving credit facility and a
6
-year
$2.75 billion
term loan. On February 2, 2016, the Company entered into a definitive term loan agreement with a syndicate of lenders, and Barclays as administrative agent and collateral agent, under which it borrowed
$2.5 billion
in the first quarter of 2016. The
$2.475 billion
of net proceeds from the term loan were deposited into escrow accounts.
As a result of the termination of the merger agreement, the agreements governing the term loan and commitments for the asset-based revolving credit facility were terminated, and on May 13, 2016 the
$2.5 billion
par value of the term loan was repaid to the lenders. The receipt of the
$2.475 billion
of net proceeds and subsequent repayment of the loan at par are not reflected in the condensed consolidated statements of cash flows, given that the proceeds were deposited directly into escrow rather than into the Company's unrestricted cash accounts, and were repaid to the lenders directly from escrow.
The Company paid interest and fees related to these sources of financing of
$156 million
in 2016. Of this amount,
$91 million
was accrued in 2015; and
$39 million
was recorded as interest expense in
2016
, respectively; and
$26 million
was recorded as a loss on early extinguishment of debt in 2016, related to the acceleration of the unamortized balances of the
$25 million
original issue discount ("OID") and
$2 million
of deferred financing costs related to the term loan. The Company also earned
$2 million
of interest income on the amounts held in escrow.
During 2016 the Company made cash payments totaling
$66 million
into the escrow accounts, representing deposits for the
1.0%
OID and for the monthly interest payments related to the term loan. These amounts are included in Increase in restricted cash within the Investing Activities section of the condensed consolidated statement of cash flows for 2016. Of the
$156 million
of total interest and fees paid during 2016:
|
|
|
|
•
|
$68 million
was paid directly from the escrow accounts to the lenders (representing the
$66 million
paid into escrow plus the
$2 million
of interest income earned on the funds held therein). Because these payments were made directly from escrow, they are considered non-cash operating activities that are not reflected in the condensed consolidated statements of cash flows.
|
|
|
|
|
•
|
$88 million
was paid from Staples unrestricted cash accounts. This amount is reflected in the Operating activities section of the condensed consolidated statement of cash flows for 2016.
|
There were no amounts remaining in escrow as of January 28, 2017.