Derivative Instruments and Hedging Activities

Staples uses interest rate swaps, foreign currency swaps and foreign currency forward 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 the underlying exposures related to 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 non-derivative 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 non-derivative 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 table below presents the fair value of the Company's derivative financial instruments that qualify for hedge accounting as well as their classification on the condensed consolidated balance sheet as of October 27, 2012 and January 28, 2012 (in thousands):



		Fair Value
	Condensed Consolidated Balance Sheet Location	October 27, 2012			January 28, 2012
Asset derivatives:
Foreign currency forward	Other assets	$	529		$	—
Liability derivatives:
Interest rate swaps	Other long-term liabilities	$	(444	)	$	—
Foreign currency forward	Other long-term liabilities	(25,068		)	(21,974		)
Foreign currency swaps	Other long-term liabilities	—			(14,353		)
Total		$	(25,512	)	$	(36,327	)

The tables below present gains and losses recognized in Other Comprehensive Income ("OCI") during the third quarter and year-to-date 2012 and 2011 related to derivative financial instruments designated as cash flow hedges or net investment hedges, as well as the amount of gains and losses reclassified into earnings during those periods (in thousands):



		Gain (loss) recognized in OCI						Gain (loss) reclassified into earnings				Location of gain (loss) recognized in earnings
		October 27, 2012						October 27, 2012
Derivative Type	Hedge Designation	13 Weeks Ended			39 Weeks Ended			13 Weeks Ended		39 Weeks Ended
Interest rate swaps	Cash flow	$	1,649		$	(444	)	$	—	$	—	—
Foreign currency swaps	Net investment	(2,983		)	(505		)	—		—		—
Foreign currency forward	Net investment	(5,410		)	1,723			—		—		—



		Gain (loss) recognized in OCI					Gain (loss) reclassified into earnings					Location of gain (loss) recognized in earnings
		October 29, 2011					October 29, 2011
Derivative Type	Hedge Designation	13 Weeks Ended		39 Weeks Ended			13 Weeks Ended		39 Weeks Ended

Interest rate swaps	Cash flow	$	—	$	427		$	—	$	(304	)	Interest expense
Foreign currency swaps	Cash flow	3,631		—			900		900			Other expense
Foreign currency swaps	Net investment	12,533		(5,318		)	—		—			—

Interest Rate Swaps:

During the second quarter of 2012, Staples entered into a series of interest rate swap agreements for an aggregate notional amount of $275.0 million. These swaps were designated as cash flow hedges of interest rate risk, and are used to hedge the Company's exposure to the variability in future cash flows associated with forecasted issuances of debt over a maximum period of twelve months. The effective portion of changes in the fair value of these derivatives is recorded in accumulated other comprehensive income (loss) ("AOCI") and will subsequently be reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI will be reclassified to interest expense as interest payments are made on the Company's forecasted issuances of fixed-rate debt. During the next twelve months, the Company does not expect a material amount to be reclassified to the consolidated statement of comprehensive income as an increase to interest expense. At October 27, 2012, these interest rate swaps had an aggregate fair value loss of $0.4 million which was included in other long-term obligations. No amounts were included in the condensed consolidated statement of comprehensive income in the third quarter of 2012 related to ineffectiveness associated with these cash flow hedges. The Company has agreements with its interest rate swap counterparties that contain provisions whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. At October 27, 2012, the termination value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $1.1 million. As of October 27, 2012, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at its termination value.

In March 2010, Staples entered into interest rate swaps for an aggregate notional amount of $750 million. These swaps were designated as a fair value hedge and designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation. In September 2011, the Company terminated the $750 million interest rate swaps, realizing a gain of $30.3 million which was recorded as an adjustment to the carrying value of the debt and is being amortized to interest expense over the remaining term of the January 2014 Notes. No amounts had been included in the condensed consolidated statement of comprehensive income in the year-to-date 2011 related to ineffectiveness associated with this fair value hedge.

In January 2003, Staples entered into interest rate swaps for an aggregate notional amount of $325 million. These swaps were designated as a fair value hedge and designed to convert the October 2012 Notes into a variable rate obligation. In September 2011, the Company terminated the $325 million interest rate swaps, realizing a gain of $12.4 million which was recorded as an adjustment to the carrying value of the debt and was amortized to interest expense over the remaining term of the October 2012 Notes, which were repaid in full in October 2012. No amounts were included in the condensed consolidated statement of comprehensive income in the year-to-date 2011 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 of the termination of these interest rate swap agreements, the Company recognized a loss of $0.3 million during the second quarter of 2011.

Foreign Currency Swaps and Foreign Currency Forwards:

In October 2012, the Company entered into a foreign currency forward that has been designated as a foreign currency hedge on Staples’ net investment in Euro-denominated subsidiaries. Under the terms of the agreement, Staples, upon maturity of the agreement in November 2012, is entitled to receive 116 million Euros and is obligated to pay 150 million Canadian dollars. At October 27, 2012, this derivative had a fair value gain of $0.5 million which was included in other long-term assets. No amounts were included in the condensed consolidated statement of comprehensive income for the third quarter of 2012 related to ineffectiveness associated with this net investment hedge.

In September 2012, the Company entered into a foreign currency forward that has been designated as a foreign currency hedge on Staples’ net investment in Euro-denominated subsidiaries. Upon maturity of the agreement in October 2012, Staples received 121 million Euros and paid 150 million Canadian dollars, recognizing a loss of $6.7 million which was recorded as a foreign currency translation loss within other comprehensive income.

In May 2012, the Company entered into a foreign currency forward that has been designated as a foreign currency hedge on Staples’ net investment in Euro-denominated subsidiaries. Upon maturity of the agreement in September 2012, Staples received 115 million Euros and paid 150 million Canadian dollars, recognizing a gain of $7.9 million which was recorded as a foreign currency translation gain within other comprehensive income.

In December 2011, the Company entered into foreign currency forward designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans total 750 million Canadian dollars in the aggregate and are scheduled to mature at various dates between October 2012 and October 2013. Staples, upon full maturity of the agreements, will collect $720 million and will be obligated to pay 750 million Canadian dollars. The forward agreements are being accounted for as a fair value hedge. In the third quarter of 2012, the Company settled 150 million Canadian dollars of the notional amount relating to this forward, realizing a loss of approximately $8.7 million which has been recorded within Other expense. At October 27, 2012 and January 28, 2012, the foreign currency forward had an aggregate fair value loss of $25.1 million and $22.0 million, respectively, which was included in other long-term obligations. The effective portion of this hedge is included as a component of Other expense. No amounts were included in the condensed consolidated statement of comprehensive income for year-to-date 2012 related to ineffectiveness associated with this fair value hedge. During the third quarter and year-to-date 2012, losses of $6.3 million and $3.1 million, respectively, were recognized in Other expense related to the outstanding portion of this fair value hedge.

In May 2011, the Company entered into a foreign currency swap designed to convert a $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 was accounted for as a cash flow hedge. No amounts were included in the condensed consolidated statement of comprehensive income for year-to-date 2011 related to ineffectiveness associated with this cash flow hedge. Upon maturity of the agreement in August 2011, Staples paid 76.4 million Australian dollars and recognized a gain of $0.9 million.

In August 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. In the first quarter of 2012, the Company terminated $50 million of this swap, realizing a loss of approximately $3.0 million which was recorded as a foreign currency translation loss within other comprehensive income. In the second quarter of 2012, the Company terminated an additional $150 million of this swap, realizing a loss of approximately $6.2 million which was also recorded as a foreign currency translation loss within other comprehensive income. In the third quarter of 2012, the Company terminated the remaining $100 million of the swap agreement, recognizing a loss of approximately $5.6 million and which was also recorded as a foreign currency translation loss within other comprehensive income. At January 28, 2012, the currency swap had an aggregate fair value loss of $14.4 million, which was included in Other long-term obligations, and at October 27, 2012 the swap agreement had been fully settled. No amounts were included in the condensed consolidated statement of comprehensive income for year-to-date 2012 or 2011 related to ineffectiveness associated with this net investment hedge.