Staples 2005 Annual Report Download - page 85

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
B-11
acquisition strategy that is not projected to require significant amounts of capital means that we will likely generate
operating cash flow in excess of our expected needs, thereby strengthening our credit profile. To use this excess cash to
benefit our stockholders, in 2004 we implemented a $1.0 billion share repurchase program and paid an annual cash
dividend. Under the repurchase program, we repurchased approximately $500 million of common stock during 2004 and
approximately $500 million in 2005. During the third quarter of 2005, we announced a new repurchase program under
which we may repurchase up to an additional $1.5 billion of Staples common stock through February 2, 2008 following
completion of our $1.0 billion repurchase program. Under our new repurchase program, we repurchased approximately
$150 million of common stock during 2005 for a total repurchase of approximately $650 million during 2005. We paid an
annual cash dividend of $0.17 per share of common stock (or $0.25 per share prior to adjusting for the three-for-two
common stock split distributed in the form of a common stock dividend on April 15, 2005) on April 14, 2005 to
shareholders of record on March 28, 2005, resulting in a total dividend payment of $123.4 million. On February 28, 2006,
we announced that we would pay a cash dividend of $0.22 per share on April 20, 2006, to shareholders of record on
March 31, 2006. While it is our current intention to pay annual cash dividends in years following 2006, any decision to
pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition
and other factors.
Inflation and Seasonality
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon operating
results, there can be no assurance that our business will not be affected by inflation or deflation in the future. We believe
that our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of
our fiscal year.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risk from changes in interest rates and foreign exchange rates. We have a risk
management control process to monitor our interest rate and foreign exchange risks. The risk management process uses
analytical techniques, including market value, sensitivity analysis and value at risk estimates.
As more fully described in the notes to the consolidated financial statements, we use interest rate swap agreements
to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates
and ensuring that the debt instruments are always reflected at fair value. While our variable rate debt obligations,
approximately $525.0 million at January 28, 2006, expose us to the risk of rising interest rates, management does not
believe that the potential exposure is material to our overall financial performance or results of operations. Based on
January 28, 2006 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of
causing a $5.3 million additional pre-tax charge or credit to our statement of operations.
As more fully described in the notes to the consolidated financial statements, we are exposed to foreign exchange
risks through subsidiaries in Canada, Austria, Belgium, Czech Republic, Denmark, France, Germany, Hungary, Italy,
Luxembourg, Poland, Portugal, Spain, Sweden, Switzerland, The Netherlands, the United Kingdom, Argentina ,Brazil
and China. We have entered into a currency swap in Canadian dollars in order to hedge a portion of our foreign
exchange risk related to our net investment in foreign subsidiaries. Any increase or decrease in the fair value of our
currency exchange rate sensitive derivative instruments would be offset by a corresponding decrease or increase in the
fair value of the hedged underlying asset.
We account for our interest rate and currency swap agreements using hedge accounting treatment as the derivatives
have been determined to be highly effective in achieving offsetting changes in fair value of the hedged items. Under this
method of accounting, at January 28, 2006, we have recorded a $0.6 million asset representing gross unrealized gains on
one of our derivatives and a $75.2 million liability representing gross unrealized losses on two other derivatives. During
fiscal 2001, we terminated an interest swap agreement resulting in a realized gain of $18.0 million which is being
amortized into income through August 2007, the remaining term of the original agreement. We do not enter into
derivative agreements for trading purposes.