Notes to Condensed Consolidated Financial Statements (unaudited)
Note A
—
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples” or “the Company”). All intercompany accounts and transactions have been eliminated in consolidation. These financial statements are for the period covering the
13
weeks ended
April 30, 2016
(also referred to as the “
first quarter of
2016
") and the period covering the
13
weeks ended
May 2, 2015
(also referred to as the “
first quarter of
2015
”).
These financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In the opinion of management, these financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
("Annual Report").
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. Our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January back-to-business seasons.
Note B
—
Recent Accounting Pronouncements
In March 2016, a pronouncement was issued that aims to simplify several aspects of accounting and reporting for share-based payment transactions. One provision 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. The Company is currently evaluating the potential impact that this provision, which is to be applied prospectively, will have on its financial statements. The Company does not expect the other provisions within the pronouncement will have a material impact on its financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods, with early adoption permitted.
Note C
—
Restructuring Charges
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. Pursuant to this plan, the Company closed
242
stores during 2014 and 2015. This plan has been extended and the Company expects to close at least
50
additional stores in North America during 2016. In connection with these additional closures, in 2016 the Company expects to incur charges of approximately
$30 million
to
$60 million
for contractual lease obligations, up to
$5 million
for impairment and accelerated depreciation of store assets, less than
$5 million
for severance and
$10 million
to
$15 million
in other associated costs. These charges relate to the Company's North American Stores & Online segment.
In 2014 the Company also initiated a cost savings plan to generate annualized pre-tax savings of approximately
$500 million
by the end of fiscal 2015. Actions related to the cost saving plan were largely complete as of the end of 2015.
During the first quarter of
2016
, the Company recorded restructuring charges of
$11 million
primarily related to lease obligations for closed retail stores. These charges relate to the Company's North American Stores & Online segment.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The table below shows a reconciliation of the beginning and ending liability balances for each major type of cost associated with the 2014 Restructuring Plan (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Plan
|
|
|
Employee-Related
|
|
Contractual Obligations
|
|
Other
|
|
Total
|
Accrued restructuring balance as of January 30, 2016
|
|
$
|
74
|
|
|
$
|
83
|
|
|
$
|
1
|
|
|
$
|
158
|
|
Charges
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Cash payments
|
|
(17
|
)
|
|
(15
|
)
|
|
(1
|
)
|
|
(33
|
)
|
Foreign currency translations
|
|
1
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Accrued restructuring balance as of April 30, 2016
|
|
$
|
58
|
|
|
$
|
80
|
|
|
$
|
—
|
|
|
$
|
138
|
|
In addition to the contractual obligations shown in the tables above, the Company also had related liabilities of
$9 million
and
$8 million
recorded on the consolidated balance sheet as of
April 30, 2016
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 Restructuring Plan,
$52 million
of contractual obligations are included within Other long-term obligations and the remaining balances are included within Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet as of
April 30, 2016
. The Company expects that payments related to employee related liabilities will be substantially completed by the end of the first quarter of 2017. The Company anticipates that payments related to facility lease obligations will be completed by the end of fiscal year 2025.
During the
first quarter of
2015
, the Company recorded restructuring charges of
$43 million
related to the 2014 Restructuring Plan, including
$31 million
for lease obligations,
$8 million
for employee-related costs, and
$4 million
for other associated costs. These costs primarily related to the closure of North American retail stores. The Company also recorded
$5 million
of charges for accelerated depreciation and impairment of long-lived assets in the first quarter of 2015, primarily related to the closure of facilities supporting the Company's North American delivery operations.
The table below shows how the restructuring charges reflected in the Company's consolidated statement of income would have been allocated if the Company had recorded the expenses within the functional departments of the restructured activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
13 Weeks Ended
|
|
|
April 30, 2016
|
|
May 2, 2015
|
Cost of goods sold and occupancy costs
|
|
$
|
11
|
|
|
$
|
31
|
|
Selling, general and administrative
|
|
—
|
|
|
12
|
|
Total
|
|
$
|
11
|
|
|
$
|
43
|
|
Note D
—
Impairment of Long-Lived Assets
Based on a strategic review the Company performed in the first quarter of 2015, the Company made a decision to dispose of certain information technology assets, incurring an impairment charge of
$22 million
. The assets were comprised of software for which the Company concluded the fair value was not material. This charge relates to the Company's North American Stores & Online segment.
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 Printing Solutions, or “SPS”) for cash consideration of
$85 million
, subject to change based on a working capital adjustment. SPS is a component of the Company’s North American Commercial segment. The transaction is scheduled to close in the second quarter of 2016. The Company expects to recognize a loss of approximately
$40
to
$45 million
on the sale of SPS, of which
$32 million
was recognized in the first quarter of 2016 and the remainder is
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
expected to be recognized upon closing in the second quarter of 2016. The loss recognized in the first quarter of 2016 represents a full write-down of the
$19 million
of goodwill and
$13 million
of long-lived assets associated with this business unit. The write-down of goodwill will not be tax deductible. The loss recognized in the first quarter of 2016 is included in (Loss) gain related to sale of businesses and assets, net in the condensed consolidated statement of comprehensive income.
In addition, as a result of the sale of SPS, the Company plans to settle SPS’s pension obligations and terminate its pension plan, the benefits under which were previously frozen. The Company expects to recognize aggregate losses of approximately
$17
-
$22 million
during the third and fourth quarters of 2016 as the settlements occur.
SPS’s pretax income in the first quarter of 2016 and 2015 was
$6 million
and
$7 million
, respectively. The table below shows the major classes of SPS’s assets and liabilities as of April 30, 2016, the balances for which are included in Prepaids and other current assets and Accrued expenses and other current liabilities, respectively (in millions).
|
|
|
|
|
ASSETS
|
April 30, 2016
|
Receivables
|
$
|
48
|
|
Inventories
|
60
|
|
Prepaid expenses & other current assets
|
4
|
|
Total assets
|
$
|
112
|
|
|
|
LIABILITIES
|
|
Accounts payable
|
$
|
16
|
|
Accrued expenses & other current liabilities
|
3
|
|
Total liabilities
|
$
|
19
|
|
During the first quarter of 2015, the Company sold certain property and equipment, recognizing a net gain of
$3 million
. The net gain was primarily driven by the sale of a distribution facility in Europe.
Note F
—
Fair Value Measurements
Accounting Standards Codification Topic 820
Fair Value Measurement
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 value of the Company's capital lease obligations approximates fair value. The carrying value of the
$2.5 billion
term loan related to the Company's proposed acquisition of Office Depot approximates fair value based on the terms and conditions included in the related agreements (see
Note G
-
Proposed Acquisition of Office Depot
).
.
The following table shows the difference between the financial statement carrying value and fair value of the Company's publicly traded debt obligations as of
April 30, 2016
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
January 30, 2016
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
January 2018 Notes
|
$
|
498
|
|
|
$
|
502
|
|
|
$
|
498
|
|
|
$
|
496
|
|
January 2023 Notes
|
497
|
|
|
498
|
|
|
496
|
|
|
488
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
From time to time, the Company invests 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
April 30, 2016
, the fair value of these investments, which are classified as Cash and cash equivalents in the condensed consolidated balance sheet, was
$16 million
. There were no material money market investments as of
January 30, 2016
.
In connection with the term loan financing for the Company's proposed acquisition of Office Depot, in the first quarter of 2016 the Company received
$2.475 billion
of net proceeds which were deposited into escrow accounts and which are included in Restricted cash in the condensed consolidated balance sheet as of April, 30, 2016 (see
Note G
-
Proposed Acquisition of Office Depot
). Of this amount, approximately
$1.5 billion
was invested in money market funds as of April 30, 2016. The carrying values of these investments are based on the principal amounts invested plus interest earned, which approximates fair value. The fair values of these investments are classified as Level 1 measurements. The carrying value of the corresponding
$2.5 billion
term loan debt approximates fair value based on the terms and conditions included in the related loan agreements.
There are no other material assets or liabilities measured at fair value.
Note G
—
Proposed Acquisition of 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, Staples will pay Office Depot a
$250 million
break-up fee on May 19, 2016.
In connection with the termination of the merger agreement, Staples is also terminating the previously announced agreement to sell customer contracts representing more than
$550 million
of revenue and related assets to Essendant Inc.
In the first quarters of fiscal 2016 and 2015, the Company incurred expenses of
$24 million
and
$11 million
in connection with the proposed transaction, primarily related to professional services associated with seeking regulatory clearances. These amounts are included in Selling, general and administrative expense in the consolidated statements of income. The Company expects to incur additional professional service fees in the second quarter of 2016 related to the proposed transaction. The Company also incurred fees and interest related to term loan financing for the transaction, as discussed below.
As a result of the termination of the merger agreement, the Company announced that it will seek strategic alternatives for its European operations, and that it has initiated a plan to generate
$300 million
of annualized pre-tax cost savings by the end of 2018 primarily by reducing product costs, optimizing promotions, increasing the mix of Staples Brand products, and reducing operating expenses. The Company also announced that it planned to resume open-market share repurchases in the second quarter of 2016 under its existing share repurchase program, the remaining authorization for which is
$373 million
. The Company expects to repurchase approximately
$100 million
of Staples stock during 2016.
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 an agreement under which the commitments for the asset-based revolving credit facility were extended until May 10, 2016. Also 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 Company will pay interest and fees of approximately
$30 million
in the second quarter of 2016 related to these sources of financing, a portion of which was previously accrued, and accelerate amortization of the
$25 million
original issue discount (OID) and
$2 million
of deferred financing costs related to the term loan.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The
$2.475 billion
of net proceeds held in escrow as of April 30, 2016 is included in Restricted cash in the condensed consolidated balance sheet as of that date. The receipt of the
$2.475 billion
of net proceeds is 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.
The Company accrued
$32 million
of interest expense related to the term loan in the first quarter of 2016, and earned
$1 million
of interest income on the net proceeds being held in escrow.
During the first quarter of 2016 the Company made cash payments totaling
$55 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 the first quarter of 2016. During the first quarter of 2016,
$20 million
of interest was paid directly from the escrow accounts to the lenders. 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. Of the
$55 million
the Company paid into escrow during the quarter,
$35 million
remained in escrow as of
April 30, 2016
, with
$25 million
related to the OID classified in Restricted cash and
$10 million
related to interest included in Prepaid expenses and other current assets in the condensed consolidated balance sheet as of
April 30, 2016
.
The Company also made cash payments of
$69 million
directly to the lenders during the first quarter of 2016 related to commitment fees earned and accrued in 2015. This amount is reflected in the Operating activities section of the condensed consolidated statement of cash flows for the first quarter of 2016.
Note H
—
Pension and Other Post-Retirement Benefit Plans
The Company sponsors pension plans that cover certain employees in Europe and the U.S. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements.
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.
The total net cost recognized for the
first quarter of
2016
associated with the pension and other post-retirement benefit plans is based on actuarial estimates of such costs. The pension plan totals primarily relate to international pension plans. The following table presents a summary of the total net periodic (benefit) cost recorded in the condensed consolidated statement of comprehensive income for the
first quarter of
2016
and
2015
related to the plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended April 30, 2016
|
|
|
Pension Plans
|
|
Other
Post-Retirement Benefit Plan
|
Service cost
|
|
$
|
3
|
|
|
$
|
—
|
|
Interest cost
|
|
5
|
|
|
1
|
|
Expected return on plan assets
|
|
(12
|
)
|
|
—
|
|
Amortization of unrecognized losses and prior service costs
|
|
3
|
|
|
1
|
|
Total (benefit) cost
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended May 2, 2015
|
|
|
Pension Plans
|
|
Other
Post-Retirement Benefit Plan
|
Service cost
|
|
$
|
4
|
|
|
$
|
—
|
|
Interest cost
|
|
7
|
|
|
1
|
|
Expected return on plan assets
|
|
(15
|
)
|
|
—
|
|
Amortization of unrecognized losses and prior service costs
|
|
4
|
|
|
—
|
|
Total cost
|
|
$
|
—
|
|
|
$
|
1
|
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Note I
—
Stockholders' Equity
Accumulated Other Comprehensive Loss
The following table details the changes in accumulated other comprehensive loss ("AOCL") for the
first quarter of
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Deferred Benefit Costs
|
|
Accumulated Other Comprehensive Loss
|
Balance at January 30, 2016
|
|
$
|
(792
|
)
|
|
$
|
(324
|
)
|
|
$
|
(1,116
|
)
|
Foreign currency translation adjustment
|
|
130
|
|
|
—
|
|
|
130
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
Amortization of deferred benefit costs (net of taxes of $0)
|
|
—
|
|
|
4
|
|
|
4
|
|
Balance at April 30, 2016
|
|
$
|
(662
|
)
|
|
$
|
(320
|
)
|
|
$
|
(982
|
)
|
There were no material amounts reclassified from accumulated other comprehensive loss into net income during the first quarter of 2016 and 2015.
Other items
The changes in the amounts of stockholders' equity attributable to noncontrolling interests during the
first quarter of
2016
and
2015
related solely to foreign currency translation adjustments.
During the first quarter of 2016, the Company issued
1 million
shares upon the vesting of restricted stock units.
Note J
—
Computation of Earnings per Common Share
The computation of basic and diluted earnings per share for the
first quarter of
2016
and
2015
is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
April 30, 2016
|
|
May 2, 2015
|
Net income
|
$
|
41
|
|
|
$
|
59
|
|
|
|
|
|
Denominator:
|
|
|
|
Weighted-average common shares outstanding
|
646
|
|
|
639
|
|
Effect of dilutive securities:
|
|
|
|
Employee stock options and restricted shares (including performance-based awards)
|
3
|
|
|
6
|
|
Weighted-average common shares outstanding assuming dilution
|
649
|
|
|
645
|
|
|
|
|
|
Basic Earnings Per Common Share
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
$
|
0.06
|
|
|
$
|
0.09
|
|
For the
first quarter of
2016
and
2015
, approximately
20 million
and
23 million
equity instruments, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Note K
—
Segment Reporting
Staples has
three
reportable segments: North American Stores & Online, North American Commercial and International Operations. The following is a summary of sales and business unit income by reportable segment and a reconciliation of business unit income to income before income taxes for the
first quarter of
2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
April 30, 2016
|
|
May 2, 2015
|
|
Sales
|
North American Stores & Online
|
$
|
2,247
|
|
|
$
|
2,372
|
|
North American Commercial
|
2,116
|
|
|
2,108
|
|
International Operations
|
738
|
|
|
782
|
|
Total segment sales
|
$
|
5,101
|
|
|
$
|
5,262
|
|
|
|
|
|
|
Business Unit Income (Loss)
|
North American Stores & Online
|
$
|
62
|
|
|
$
|
75
|
|
North American Commercial
|
148
|
|
|
134
|
|
International Operations
|
(18
|
)
|
|
(20
|
)
|
Business unit income
|
192
|
|
|
189
|
|
Stock-based compensation
|
(17
|
)
|
|
(16
|
)
|
Impairment of long-lived assets
|
—
|
|
|
(22
|
)
|
Restructuring charges
|
(11
|
)
|
|
(41
|
)
|
Accelerated depreciation related to restructuring activities
|
—
|
|
|
(4
|
)
|
(Loss) gain related to sale of businesses and assets, net
|
(32
|
)
|
|
3
|
|
Interest and other expense, net
|
(37
|
)
|
|
(14
|
)
|
Merger-related costs
|
(24
|
)
|
|
(11
|
)
|
Income before income taxes
|
$
|
71
|
|
|
$
|
84
|
|
Note L
—
Commitments and 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, as well as claims by PNI's retailer customers. 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.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
In December 2014, the Company announced that the investigation into its previously announced data security incident had determined that malware deployed by criminals to some point of sale systems at
115
of the Company’s more than
1,400
U.S. retail stores may have allowed access to transaction data at those affected stores. As a result, cardholder names, payment card numbers, expiration dates, and card verification codes for approximately
1.16 million
payment cards may have been affected. Upon detection, the Company immediately took action to eradicate the malware and commenced an investigation into the incident, working closely with payment card companies and law enforcement and with the assistance of outside data security experts. The Company also has taken steps to further enhance the security of its point of sale systems, including the use of new encryption tools. The Company continues to evaluate cybersecurity policies and practices to mitigate the risk of future incidents. Expenses incurred to date related to this incident have not been material. It is reasonably possible that the Company may incur additional expenses or losses in connection with the incident; however, at this time the Company is unable to reasonably estimate any such additional expenses or losses. In addition, the Company maintains network-security insurance coverage, which it expects would help mitigate any material financial impact.
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 approximately €
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 it 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 intends to vigorously defend. If the purchaser prevails on appeal, it could result in an adjustment, which may be material, to the loss we recorded for the transaction.
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 our estimated significant liabilities 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 condensed consolidated financial statements as of
April 30, 2016
would have a material adverse effect on its business, results of operations, financial condition, or cash flows.
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
of Financial Condition and Results of Operations