Staples 2013 Annual Report Download - page 130

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
B-16
the remaining repurchase authorization was $562.5 million as of that date. We consider several factors in determining whether
and when to execute share repurchases, including our current and projected operating results, capital expenditure requirements,
acquisitions or other strategic initiatives, our capacity for leverage, cost of borrowings and the market price of our common stock.
Inflation and Seasonality
While neither inflation nor deflation has had, nor do we expect them to have a material impact upon our consolidated
operating results, we may see price increases in certain categories from time to time. Our business is somewhat seasonal, with
sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January
back-to-business seasons.
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.
Interest Rate Risk
At February 1, 2014, we had variable rate debt obligations of approximately $100.1 million. While variable rate debt
obligations expose us to the risk of rising interest rates, management does not believe that the potential exposure is material to our
overall financial position or results of operations. Based on February 1, 2014 borrowing levels, a 1.0% increase or decrease in
current market interest rates would have the effect of causing a $1 million additional pre-tax charge or credit to our statement of
operations. In certain instances we may 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.
We had no interest rate swap agreements outstanding as of February 1, 2014.
Foreign Currency Risk
We are exposed to foreign exchange risks through our business operations and investments in subsidiaries in Canada,
Europe, Australia, South America and Asia. The currencies for which we have the most significant exposure to exchange rate
fluctuations include the Canadian Dollar, the Euro, the British Pound Sterling, the Australian Dollar and the Chinese Renminbi.
Revenue and expense transactions in our foreign subsidiaries are primarily denominated in the respective local currencies.
The income statements of our international operations are translated into U.S. dollars at the average exchange rates in each applicable
period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated
transactions results in increased revenues and operating expenses for our international operations. Conversely, our revenues and
operating expenses will decrease for our international operations when the U.S. dollar strengthens against foreign currencies.
While the matching of local currency revenues and local currency expenses provides in effect a natural hedge, such matching does
not completely reduce the foreign currency exchange rate exposure. Revenues from our foreign operations accounted for
approximately 30% and 31% of consolidated revenues in 2013 and 2012, respectively.
The conversion of our foreign subsidiaries' financial statements into U.S. dollars will lead to a translation gain or loss
which is recorded as a component of other comprehensive income (loss) in stockholders' equity. In 2013 and 2012, we recorded
consolidated foreign currency translation gains (losses) of approximately $(126.8) million and $36.6 million, respectively. In
addition, certain of our foreign subsidiaries have assets and liabilities that are denominated in currencies other than the relevant
entity's functional currency. Changes in the functional currency value of these assets and liabilities will result in a transaction gain
or loss. In 2013 and 2012, we recorded foreign currency transaction losses of $6.6 million and $3.1 million, respectively, which
are recorded in Other income (expense), net in our consolidated statement of income.
Our international business is subject to risks, including, but not limited to differing economic conditions, changes in
political climate, differing tax structures, and other regulations and restrictions, all of which may influence foreign currency
exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.
As exchange rates vary, our international financial results may vary from expectations and adversely impact our overall operating
results.
In accordance with our risk management policies, we use derivative instruments on a limited basis to hedge our foreign
currency exposures (see Note H - Derivative Instruments and Hedging Activities to the Notes to the Consolidated Financial
Statements). Any increase or decrease in the fair value of our currency exchange rate sensitive derivative instruments would be