Staples 2003 Annual Report Download - page 63

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Our expanding International operations expose us to the unique risks inherent in foreign operations. In addition to our
recently expanding operations in Europe, we have a significant presence in Canada through The Business Depot Ltd. We
may also seek to expand further into other international markets in the future. Our foreign operations encounter risks
similar to those faced by our U.S. operations, as well as risks inherent in foreign operations, such as local customs and
competitive conditions and foreign currency fluctuations. Further, our recent European mail order acquisition has
increased our exposure to these foreign operating risks, which could have an adverse impact on our European income
and worldwide profitability.
Our debt level could impact our ability to obtain future financing and continue our growth strategy. Our consolidated
outstanding debt at February 1, 2003 was $1.03 billion. Our consolidated debt may have the effect generally of restricting
our flexibility in responding to changing market conditions and could make us more vulnerable in the event of a
downturn in our business. In addition, our level of indebtedness may have other important consequences, including:
restricting our growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional
amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate
purposes; and limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional
funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve to eighteen months or
thereafter.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risk from changes in interest rates and foreign exchange rates. We have a risk
management control process to monitor our interest rate and foreign exchange risks. The risk management process uses
analytical techniques, including market value, sensitivity analysis, and value at risk estimates.
As more fully described in the notes to the consolidated financial statements, we use interest rate swap agreements
to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates
and ensuring that the debt instruments are always reflected at fair value. While our variable rate debt obligations,
approximately $1.01 billion at February 1, 2003, expose us to the risk of rising interest rates, management does not
believe that the potential exposure is material to our overall financial performance or results of operations. Based on
February 1, 2003 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of
causing a $10.1 million additional pre-tax charge or credit to our statement of operations than otherwise would occur if
interest rates remain unchanged.
As more fully described in the notes to the consolidated financial statements, we are exposed to foreign exchange
risks through subsidiaries in Canada, the United Kingdom, Germany, the Netherlands, Portugal, France, Belgium, Spain
and Italy. We have entered into currency swaps in Canadian dollars and issued Euro denominated notes in order to
hedge a portion of our foreign exchange risk related to our net investments in foreign subsidiaries and specific economic
transactions. Any increase or decrease in the fair value of our currency exchange rate sensitive derivative instruments
would be offset by a corresponding decrease or increase in the fair value of the hedged underlying asset, liability or cash
flow.
We account for our interest rate and currency swap agreements using hedge accounting treatment as the derivatives
have been determined to be highly effective in achieving offsetting changes in fair value of the hedged items. Under this
method of accounting, at February 1, 2003, we have recorded a $45.6 million asset representing gross unrealized gains on
two of our derivatives and a $2.7 million liability representing a gross unrealized loss on another derivative. During fiscal
2001, we terminated an interest swap agreement resulting in a realized gain of $18.0 million which is being amortized
into income through August, 2007, the remaining term of the original agreement. We do not enter into derivative
agreements for trading purposes.
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