Staples 2006 Annual Report Download - page 104

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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
B-10
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 $525.0 million at February 3, 2007, 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 3, 2007 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of
causing a $5.3 million additional pre-tax charge or credit to our statement of operations.
As more fully described in the notes to the consolidated financial statements, we are exposed to foreign exchange
risks through subsidiaries in Canada, Austria, Belgium, the Czech Republic, Denmark, France, Germany, Hungary, Italy,
Luxembourg, Poland, Portugal, Spain, Sweden, Switzerland, The Netherlands, the United Kingdom, Argentina, Brazil,
China and Taiwan. We have entered into a currency swap in Canadian dollars in order to hedge a portion of our foreign
exchange risk related to our net investment in foreign subsidiaries. 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.
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 3, 2007, we have recorded a $0.3 million asset representing gross unrealized gains on
one of our derivatives and a $70.7 million liability representing gross unrealized losses on three other derivatives. 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.