v2.3.0.11
Derivative Instruments and Hedging Activities
 6 Months Ended
Jul. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
 
Staples uses interest rate swap agreements and foreign currency swap agreements to offset certain operational and balance sheet exposures related to changes in interest or foreign exchange rates.  These agreements are entered into to support transactions made in the normal course of business and accordingly are not speculative in nature.  These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.
 
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings.  If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Company’s net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions.  There are no amounts excluded from the assessment of hedge effectiveness.
 
The Company classifies the fair value of all derivative contracts and the fair value of its hedged firm commitments as either current or long-term depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company’s condensed consolidated statement of cash flows in the same category as the item being hedged.
 
Interest Rate Swaps:   On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325 million, designed to convert Staples' $325 million, 7.375% notes due October 1, 2012 (the “October 2012 Notes”) into a variable rate obligation.  The swap agreement, scheduled to terminate on October 1, 2012, is designated as a fair value hedge of the October 2012 Notes.  Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the October 2012 Notes.  At July 30, 2011 and January 29, 2011, the interest rate swap agreement had a fair value gain of $17.9 million and $23.0 million, respectively, which were included in other assets.  No amounts were included in the condensed consolidated statement of income for the second quarter and first half of 2011 or 2010 related to ineffectiveness associated with this fair value hedge.
  
On March 16, 2010, Staples entered into an interest rate swap, for an aggregate notional amount of $750 million, designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation.  The swap agreement, scheduled to terminate on January 15, 2014, is designated as a fair value hedge of half of the aggregate principal amount of the January 2014 Notes.  Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 9.75% and is required to make semi-annual interest payments at a floating rate equal to the 3 month LIBOR plus 7.262%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the January 2014 Notes.  At July 30, 2011 and January 29, 2011, the interest rate swap agreement had a fair value gain of $28.8 million and $21.4 million, respectively, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the second quarter and first half of 2011 or 2010 related to ineffectiveness associated with this fair value hedge.
 
In connection with Staples’ acquisition of Corporate Express, the Company assumed interest rate swaps designed to convert Corporate Express’ variable rate credit facilities into fixed rate obligations.  On May 5, 2011, the Company repaid the outstanding balance on these variable rate credit facilities and terminated the related interest rate swap agreements. As a result, $0.3 million was recognized as a loss related to the termination of these interest rate swap agreements.


Foreign Currency Swaps:  On August 15, 2007, the Company entered into a $300 million foreign currency swap that has been designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries.   Staples, upon maturity of the agreement in October 2012, will be entitled to receive $300 million and will be obligated to pay 316.2 million in Canadian dollars. Staples will also be entitled to receive quarterly interest payments on $300 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%.  At July 30, 2011 and January 29, 2011, the currency swap had aggregate fair value losses of $28.9 million and $11.0 million, respectively, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the second quarter and first half of 2011 or 2010 related to ineffectiveness associated with this net investment hedge.


On May 4, 2011, the Company entered into a foreign currency swap designed to convert an AUD $75 million intercompany loan denominated in Australian dollars into a fixed Euro amount. The intercompany loan had a fixed interest rate of 6.65%. The agreement is being accounted for as a cash flow hedge. Upon maturity of the agreement in August 2011, Staples will be obligated to pay AUD $76.4 million. At July 30, 2011, the currency swap had fair value loss of $3.6 million, which was included in stockholder's equity as a component of accumulated other comprehensive income (loss). No amounts were included in the condensed consolidated statement of income for the second quarter and first half of 2011 related to ineffectiveness associated with this cash flow hedge. The amount of estimated cash flow hedge unrealized gains or losses expected to be reclassified to earnings in the next twelve months is not significant.
 
Accumulated other comprehensive income (loss) includes foreign currency losses, net of taxes, of $2.6 million and $13.6 million for the second quarter and first half of 2011, respectively, and foreign currency income of $2.2 million and foreign currency loss of $4.4 million for the second quarter and first half of 2010, respectively.