Derivative Instruments and Hedging Activities

3 Months Ended

Apr. 28, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

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 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 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 is being amortized over the remaining term of the October 2012 Notes. No amounts were included in the condensed consolidated statement of comprehensive income in the first quarter of 2011 related to ineffectiveness associated with this fair value hedge.

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 is being amortized over the remaining term of the January 2014 Notes. No amounts were included in the condensed consolidated statement of comprehensive income in the first quarter of 2011 related to ineffectiveness associated with this fair value hedge.

Foreign Currency Swaps and Foreign Currency Forwards: 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. Under the original terms of the agreement, Staples, upon maturity of the agreement in October 2012, was entitled to receive $300 million and was obligated to pay 316.2 million Canadian dollars. Staples was also entitled to receive quarterly interest payments on $300 million at a fixed rate of 5.28%, and obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%.  In the first quarter of2012, the Company terminated $50 million of this swap, realizing a loss of approximately $3.0 million which has been recorded as a foreign currency translation loss within other comprehensive income. The $250 million remaining notional amount under the swap agreement has been re-designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. At April 28, 2012 and January 28, 2012, the currency swap had an aggregate fair value loss of $16.6 million and $14.4 million, respectively, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of comprehensive income for the first quarter of2012 or 2011 related to ineffectiveness associated with this net investment hedge.

In December 2011, the Company entered into a 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 U.S. dollars. The forward agreements are being accounted for as a fair value hedge. At April 28, 2012 and January 28, 2012, the foreign currency forward had an aggregate fair value loss of $35.4 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 the first quarter of2012 related to ineffectiveness associated with this fair value hedge