Derivative Instruments and Hedging Activities

9 Months Ended

Oct. 29, 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:   In January 2003, Staples entered into interest rate swaps, that were designated as a fair value hedge, for an aggregate notional amount of $325 million, designed to convert the October 2012 Notes into a variable rate obligation.  In September 2011, the Company terminated the $325 million interest rate swaps, recognizing a gain of $12.4 million, which is being amortized over the remaining term of the October 2012 Notes.

In March 2010, Staples entered into interest rate swaps that were designated as a fair value hedge, 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.  In September 2011, the Company terminated the $750 million interest rate swaps, recognizing a gain of $30.3 million, which is being amortized over the remaining term of the January 2014 Notes.

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.  In May 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: 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. 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 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 October 29, 2011 and January 29, 2011, the currency swap had aggregate fair value losses of $16.3 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 third quarter and year-to-date2011 or 2010 related to ineffectiveness associated with this net investment 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 being accounted for as a cash flow hedge. Upon maturity of the agreement in August 2011, Staples paid AUD 76.4 million and recognized a gain of $0.9 million.

In August 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 has a fixed interest rate of 6.65%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement on October 31, 2011, Staples will be obligated to pay AUD 76.4 million. At October 29, 2011, the currency swap had a fair value loss of $4.5 million, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date2011 related to ineffectiveness associated with this fair value hedge.

In October 2011, the Company entered into a foreign currency swap designed to convert a 118.3 million intercompany loan denominated in Canadian dollars into a fixed US dollar amount. The intercompany loan has a fixed interest rate of 1.8%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples will be obligated to pay $112.1 million. At October 29, 2011, the currency swap had a fair value gain of $6.9 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date2011 related to ineffectiveness associated with this fair value hedge.

In October 2011, the Company entered into a foreign currency swap designed to convert a 79.5 million intercompany loan denominated in Canadian dollars into a fixed euro amount. The intercompany loan has a fixed interest rate of 1.32%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples will be obligated to pay $77.3 million. At October 29, 2011, the currency swap had a fair value gain of $1.2 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date2011 related to ineffectiveness associated with this fair value hedge.

Accumulated other comprehensive income (loss) includes foreign currency gains (losses), net of taxes, of $10.9 million and $(2.7) million for the third quarter and year-to-date2011, respectively, and foreign currency losses, net of taxes, of $1.6 million and $6.0 million for the third quarter and year-to-date2010, respectively.