TJ Maxx 2009 Annual Report Download - page 76

E. Financial Instruments
TJX enters into financial instruments to manage its cost of borrowing and to manage its exposure to changes in fuel
costs and foreign currency exchange rates. TJX recognizes all derivative instruments as either assets or liabilities in the
statements of financial position and measures those instruments at fair value. Changes to the fair value of derivative
contracts that do not qualify for hedge accounting are reported in earnings in the period of the change. For derivatives
that qualify for hedge accounting, changes in the fair value of the derivatives are either recorded in shareholders’ equity as
a component of other comprehensive income or are recognized currently in earnings, along with an offsetting
adjustment against the basis of the item being hedged. Effective in the fourth quarter of fiscal 2009, TJX no longer
entered into contracts to hedge its net investments in foreign subsidiaries and settled all existing contracts. As a result,
there were no net investment contracts as of January 30, 2010 or January 31, 2009.
Interest Rate Contracts: During fiscal 2004, TJX entered into interest rate swaps on $100 million of the $200 million
ten-year notes outstanding at that time, effectively converting the interest on that portion of the unsecured notes from fixed
to a floating rate of interest indexed to the six-month LIBOR rate. The interest rate swaps settled in December 2009.
Under these swaps, TJX paid a specific variable interest rate and received the fixed rate applicable to the underlying debt.
The interest income/expense on the swaps was accrued as earned and recorded as an adjustment to the interest expense
accrued on the fixed-rate debt. The interest rate swaps were designated as fair value hedges on the underlying debt. The fair
value of the contracts, excluding the net interest accrual, amounted to an asset of $1.6 million as of January 31, 2009 and an
asset of $1.2 million at January 26, 2008. The valuation of the swaps resulted in an offsetting fair value adjustment to the
debt hedged. Accordingly, current installments of long-term debt was increased by $1.6 million in fiscal 2009 and by
$1.2 million in fiscal 2008. The average effective interest rate on $100 million of the 7.45% unsecured notes, inclusive of
the effect of hedging activity, was approximately 4.04% in fiscal 2010, 6.54% in fiscal 2009 and 8.77% in fiscal 2008.
Concurrent with the issuance of the C$235 million three-year note in fiscal 2006, TJX entered an interest rate swap
on the principal amount of the note effectively converting the interest on the note from floating to a fixed rate. In January
2009 this interest rate swap settled, one year before the maturity date of the underlying debt, which was extended one
year to January 2010 and subsequently repaid in the second quarter of fiscal 2010 before its scheduled maturity. Under
this swap TJX paid a specified fixed interest rate and received the floating rate applicable to the underlying debt. The
interest income/expense on the swap was accrued as earned and recorded as an adjustment to the interest expense accrued
on the floating-rate debt. The interest rate swap was designated as a cash flow hedge of the underlying debt. The fair value
of the interest rate swap, excluding the net interest accrual, amounted to an asset of $1.1 million (C$1.1 million) as of
January 26, 2008. The valuation of the swap resulted in an adjustment to other comprehensive income of a similar
amount. The average effective interest rate on the note, inclusive of the effect of hedging activity, was approximately
4.50% in both fiscal 2009 and 2008.
Diesel Fuel Contracts: During fiscal 2010, TJX entered into agreements to hedge a portion of its notional diesel
requirements for fiscal 2011, based on the diesel fuel consumed by independent freight carriers transporting the
Company’s inventory. These economic hedges relate to 10% of our notional diesel requirements in the second quarter of
fiscal 2011 and 20% of our notional diesel requirements in the third and fourth quarters of fiscal 2011. These diesel fuel
hedge agreements will settle during the last three quarters of fiscal 2011 and expire in February 2011. During fiscal 2009,
TJX entered into agreements to hedge approximately 30% of its notional diesel fuel requirements for fiscal 2010, which
settled throughout the year and terminated in February 2010. Independent freight carriers transporting the Company’s
inventory charge TJX a mileage surcharge for diesel fuel price increases as incurred by the carrier. The hedge agreements
are designed to mitigate the volatility of diesel fuel pricing (and the resulting per mile surcharges payable by TJX) by
setting a fixed price per gallon for the year. TJX elected not to apply hedge accounting rules to these contracts. The
change in the fair value of the hedge agreements resulted in a gain of $4.5 million in fiscal 2010 and a loss of $4.9 million
in fiscal 2009 both of which are reflected in earnings as a component of cost of sales, including buying and occupancy
costs.
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