Note E. Financial Instruments

As a result of its operating and financing activities, TJX is exposed to market risks from changes in interest and foreign currency exchange rates and fuel costs. These market risks may adversely affect TJX’s operating results and financial position. TJX seeks to minimize risk from changes in interest and foreign currency exchange rates and fuel costs through the use of derivative financial instruments when and to the extent deemed appropriate. TJX does not use derivative financial instruments for trading or other speculative purposes and does not use any leveraged derivative financial instruments. TJX recognizes all derivative instruments as either assets or liabilities in the statements of financial position and measures those instruments at fair value. The fair values of the derivatives are classified as assets or liabilities, current or non-current, based upon valuation results and settlement dates of the individual contracts. Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in earnings in the period of the change. For derivatives that qualify for hedge accounting, changes in the fair value of the derivatives are either recorded in shareholders’ equity as a component of other comprehensive income or are recognized currently in earnings, along with an offsetting adjustment against the basis of the item being hedged. TJX does not hedge its net investments in foreign subsidiaries.

Diesel Fuel Contracts

TJX hedges portions of its estimated notional diesel requirements based on the diesel fuel expected to be consumed by independent freight carriers transporting TJX’s inventory. Independent freight carriers transporting TJX’s inventory charge TJX a mileage surcharge based on the price of diesel fuel. The hedge agreements are designed to mitigate the volatility of diesel fuel pricing (and the resulting per mile surcharges payable by TJX) by setting a fixed price per gallon for the period being hedged. During fiscal 2017 and the first six months of fiscal 2018, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for fiscal 2018. In addition, during fiscal 2018, TJX entered into agreements to hedge a portion of its estimated notional diesel requirements for the first half of fiscal 2019. The hedge agreements outstanding at July 29, 2017 relate to approximately 53% of TJX’s estimated notional diesel requirements for the remainder of fiscal 2018 and approximately 46% of TJX’s estimated notional diesel requirements for the first six months of fiscal 2019. These diesel fuel hedge agreements will settle throughout the remainder of fiscal 2018 and the first seven months of fiscal 2019. TJX elected not to apply hedge accounting rules to these contracts.

Foreign Currency Contracts

TJX enters into forward foreign currency exchange contracts to obtain economic hedges on portions of merchandise purchases made and anticipated to be made by the Company’s operations at TJX International (United Kingdom, Ireland, Germany, Poland, Austria, The Netherlands and Australia), TJX Canada (Canada), Marmaxx (U.S.) and HomeGoods (U.S.) in currencies other than their respective functional currencies. These contracts typically have a term of twelve months or less. The contracts outstanding at July 29, 2017 cover a portion of such actual and anticipated merchandise purchases throughout the remainder of fiscal 2018 and the first quarter of fiscal 2019. Additionally, TJX’s operations in Europe are subject to foreign currency exposure as a result of their buying function being centralized in the United Kingdom. All merchandise is purchased centrally in the U.K. and then shipped and billed to the retail entities in other countries. This intercompany billing to TJX’s European businesses’ Euro denominated operations creates exposure to the central buying entity for changes in the exchange rate between the Euro and British Pound. The inflow of Euros to the central buying entity provides a natural hedge for merchandise purchased from third-party vendors that is denominated in Euros. However, with the growth of TJX’s Euro denominated retail operations, the intercompany billings committed to the Euro denominated operations is generating Euros in excess of those needed to meet merchandise commitments to outside vendors. TJX calculates this excess Euro exposure each month and enters into forward contracts of approximately 30 days duration to mitigate the exposure. TJX elected not to apply hedge accounting rules to these contracts.

TJX also enters into derivative contracts, generally designated as fair value hedges, to hedge intercompany debt and intercompany interest payable. The changes in fair value of these contracts are recorded in selling, general and administrative expenses and are offset by marking the underlying item to fair value in the same period. Upon settlement, the realized gains and losses on these contracts are offset by the realized gains and losses of the underlying item in selling, general and administrative expenses.

The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at July 29, 2017:


In thousands	Pay		Receive		Blended Contract Rate		Balance Sheet Location	Current Asset U.S.$		Current (Liability) U.S.$			Net Fair Value in U.S.$ at July 29, 2017
Fair value hedges:

Intercompany balances, primarily debt and related interest
		zł 67,000	£	13,000		0.1940	(Accrued Exp)	$	—	$	(1,326	)	$	(1,326	)
		€ 69,200	£	59,813		0.8643	(Accrued Exp)		—		(3,044	)		(3,044	)
		U.S.$ 68,445	£	55,000		0.8036	Prepaid Exp		4,174		—			4,174
		A$ 40,000	£	23,781		0.5945	(Accrued Exp)		—		(676	)		(676	)

Economic hedges for which hedge accounting was not elected:

Diesel contracts		Fixed on 2.0M – 2.5M gal per month		Float on 2.0M – 2.5M gal per month		N/A	Prepaid Exp		544		—			544
Intercompany billings in Europe, primarily merchandise related	€	54,000	£	47,790		0.8850	(Accrued Exp)		—		(730	)		(730	)
Merchandise purchase commitments
		C$ 571,142	U.S.$	430,600		0.7539	(Accrued Exp)		—		(29,261	)		(29,261	)
		C$ 33,086	€	22,500		0.6800	Prepaid Exp / (Accrued Exp)		218		(361	)		(143	)
		£ 252,400	U.S.$	324,000		1.2837	(Accrued Exp)		—		(8,417	)		(8,417	)
		A$ 26,492	U.S.$	20,266		0.7650	(Accrued Exp)		—		(895	)		(895	)
		zł 326,370	£	66,993		0.2053	(Accrued Exp)		—		(1,917	)		(1,917	)
		U.S.$ 2,284	£	1,787		0.7824	Prepaid Exp		65		—			65
		U.S.$ 74,175	€	66,313		0.8940	Prepaid Exp		3,957		—			3,957

Total fair value of derivative financial instruments								$	8,958	$	(46,627	)	$	(37,669	)

The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at January 28, 2017:


In thousands	Pay		Receive		Blended Contract Rate		Balance Sheet Location	Current Asset U.S.$		Current (Liability) U.S.$			Net Fair Value in U.S.$ at January 28, 2017
Fair value hedges:
Intercompany balances, primarily debt and related interest
		zł 67,000	£	13,000		0.1940	(Accrued Exp)	$	—	$	(6	)	$	(6	)
		€ 63,000	£	54,452		0.8643	Prepaid Exp		263		—			263
		U.S.$ 68,445	£	55,000		0.8036	Prepaid Exp		1,196		—			1,196

Economic hedges for which hedge accounting was not elected:
Diesel contracts
		Fixed on 2.1M – 2.5M gal per month		Float on 2.1M– 2.5M gal per month		N/A	Prepaid Exp		2,183		—			2,183

Intercompany billings in Europe, primarily merchandise related
		€ 68,000	£	58,306		0.8574	Prepaid Exp		262		—			262
Merchandise purchase commitments
		C$ 462,025	U.S.$	349,750		0.7570	Prepaid Exp / (Accrued Exp)		1,089		(3,081	)		(1,992	)
		C$ 19,571	€	13,650		0.6975	Prepaid Exp / (Accrued Exp)		22		(290	)		(268	)
		£ 180,963	U.S.$	227,500		1.2572	Prepaid Exp / (Accrued Exp)		2,327		(2,695	)		(368	)
		zł 249,079	£	48,593		0.1951	Prepaid Exp / (Accrued Exp)		681		(927	)		(246	)
		U.S.$ 22,226	€	20,686		0.9307	Prepaid Exp / (Accrued Exp)		178		(257	)		(79	)

Total fair value of financial instruments								$	8,201	$	(7,256	)	$	945

The following is a summary of TJX’s derivative financial instruments, related fair value and balance sheet classification at July 30, 2016:


In thousands	Pay		Receive		Blended Contract Rate		Balance Sheet Location	Current Asset U.S.$		Current (Liability) U.S.$			Net Fair Value in U.S.$ at July 30, 2016
Fair value hedges:

Intercompany balances, primarily debt and related interest
		zł 57,073	C$	19,606		0.3435	Prepaid Exp	$	448	$	—		$	448
		zł 45,000	£	7,403		0.1645	(Accrued Exp)		—		(1,696	)		(1,696	)
		€ 61,000	£	47,211		0.7740	(Accrued Exp)		—		(6,079	)		(6,079	)
		U.S.$ 77,957	£	55,000		0.7055	(Accrued Exp)		—		(4,969	)		(4,969	)

Economic hedges for which hedge accounting was not elected:

Diesel contracts		Fixed on 1.8M – 2.2M gal per month		Float on 1.8M –2.2M gal per month		N/A	(Accrued Exp)		—		(4,832	)		(4,832	)

Intercompany billings in Europe, primarily merchandise related		€ 75,000	£	64,031		0.8537	Prepaid Exp		816		—			816

Merchandise purchase commitments
		C$ 518,629	U.S.$	396,300		0.7641	Prepaid Exp / (Accrued Exp)		2,192		(4,070	)		(1,878	)
		C$ 25,108	€	17,250		0.6870	Prepaid Exp / (Accrued Exp)		57		(42	)		15
		£ 223,671	U.S.$	317,750		1.4206	Prepaid Exp / (Accrued Exp)		21,716		(252	)		21,464
		U.S.$ 1,556	£	1,079		0.6934	(Accrued Exp)		—		(127	)		(127	)
		zł 278,776	£	50,509		0.1812	(Accrued Exp)		—		(4,474	)		(4,474	)
		U.S.$ 55,093	€	48,792		0.8856	Prepaid Exp / (Accrued Exp)		154		(577	)		(423	)

Total fair value of derivative financial instruments								$	25,383	$	(27,118	)	$	(1,735	)

Presented below is the impact of derivative financial instruments on the statements of income for the periods shown:


	Location of Gain (Loss)		Amount of Gain (Loss) Recognized in Income by Derivative
	Recognized in Income by		Thirteen Weeks Ended
In thousands	Derivative		July 29, 2017			July 30, 2016
Fair value hedges:

Intercompany balances, primarily debt and related interest		Selling, general and administrative expenses	$	(5,591	)	$	(14,163	)

Economic hedges for which hedge accounting was not elected:

Diesel fuel contracts		Cost of sales, including buying and occupancy costs		2,006			(3,516	)

Intercompany billings in Europe, primarily merchandise related		Cost of sales, including buying and occupancy costs		(5,045	)		(6,968	)

Merchandise purchase commitments		Cost of sales, including buying and occupancy costs		(44,098	)		37,709

Gain / (loss) recognized in income			$	(52,728	)	$	13,062


	Location of Gain (Loss)		Amount of Gain (Loss) Recognized in Income by Derivative
	Recognized in Income by		Twenty-Six Weeks Ended
In thousands	Derivative		July 29, 2017			July 30, 2016
Fair value hedges:

Intercompany balances, primarily debt and related interest		Selling, general and administrative expenses	$	(2,366	)	$	(13,286	)

Economic hedges for which hedge accounting was not elected:
Diesel fuel contracts		Cost of sales, including buying and occupancy costs		(1,317	)		(1,229	)

Intercompany billings in Europe, primarily merchandise related		Cost of sales, including buying and occupancy costs		(3,444	)		(9,076	)

Merchandise purchase commitments		Cost of sales, including buying and occupancy costs		(34,165	)		(7,279	)

Gain / (loss) recognized in income			$	(41,292	)	$	(30,870	)