Derivative Instruments and Hedging Activity

9 Months Ended

Sep. 29, 2012

Derivative Instruments and Hedging Activity

Note K – Derivative Instruments and Hedging Activity

As a global supplier of office products and services we are exposed to risks associated with changes in foreign currency exchange rates, commodity prices and interest rates. Our foreign operations are typically, but not exclusively, conducted in the currency of the local environment. We are exposed to the risk of foreign currency exchange rate changes when we make purchases, sell products, or arrange financings that are denominated in a currency different from the entity’s functional currency. Depending on the settlement timeframe and other factors, we may enter into foreign currency derivative transactions to mitigate those risks. We may designate and account for such qualifying arrangements as hedges. Gains and losses on these cash flow hedging transactions are deferred in other comprehensive income (“OCI”) and recognized in earnings in the same period as the hedged item. Transactions that are not designated as cash flow hedges are marked to market at each period with changes in value included in earnings. Historically, we have not entered into transactions to hedge our net investment in foreign operations but may in future periods.

We also are exposed to the risk of changing fuel prices from inbound and outbound transportation arrangements. The structure of many of these transportation arrangements, however, precludes applying hedge accounting. In those circumstances, we may enter into derivative transactions to offset the risk of commodity price changes, and the value of the derivative contract is marked to market at each reporting period with changes recognized in earnings. To the extent fuel arrangements qualify for hedge accounting, gains and losses are deferred in OCI until such time as the hedged item impacts earnings. At the end of the third quarter of 2012, the company had a series of monthly option contracts for approximately 2.2 million gallons of fuel through January 2013 that may or may not be executed. These contracts are not designated as hedging instruments.

Interest rate changes on our obligations may result from external market factors, as well as changes in our credit rating or availability on our asset based credit facility. We manage our exposure to interest rate risks at the corporate level. Interest rate sensitive assets and liabilities are monitored and assessed for market risk. Currently, no interest rate related derivative arrangements are in place. OCI includes the deferred gain from a hedge contract terminated in a prior period, net of the portion that was recognized as a component of the loss on extinguishment of debt during the quarter ended March 31, 2012. This deferral is being amortized to interest expense through August 2013.

Financial instruments authorized under the company’s established risk management policy include spot trades, swaps, options, caps, collars, forwards and futures. Use of derivative financial instruments for speculative purposes is expressly prohibited.

The following tables provide information on our hedging and derivative positions and activity.

	September 29, 2012				December 31, 2011				September 24, 2011
(In thousands)	Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities
Designated cash flow hedges:
Foreign exchange contracts	$	—	$	376	$	284	$	—	$	559	$	—
Non-designated hedging instruments:
Foreign exchange contracts		67		54		57		92		393		38
Commodity contracts – fuel		79		—		—		251		725		—
Total	$	146	$	430	$	341	$	343	$	1,677	$	38

	Third Quarter
	Non-Designated Hedging Instruments				Designated Cash Flow Hedges
	Amount of Gain/(Loss) Recognized in Statement of Operations(a)(b)				(Gain)/Loss Recognized in OCI				(Gain)/Loss Reclassified from OCI to Statement of Operations(c)
(In thousands)	2012		2011		2012		2011		2012		2011
Foreign exchange contracts	$	(1,936)	$	(220)	$	(369)	$	581	$	—	$	95
Commodity contracts – fuel		740		435		—		—		—		—
Total	$	(1,196)	$	215	$	(369)	$	581	$	—	$	95
	Year-to-Date
	Non-Designated Hedging Instruments				Designated Cash Flow Hedges
	Amount of Gain/(Loss) Recognized in Statement  of Operations(a)(b)				(Gain)/Loss Recognized in OCI				(Gain)/Loss Reclassified  from OCI to Statement of Operations(c)
(In thousands)	2012		2011		2012		2011		2012		2011
Foreign exchange contracts	$	(3,099)	$	(2,728)	$	(750)	$	1,346	$	134	$	450
Commodity contracts – fuel		330		3,431		—		—		—		—
Total	$	(2,769)	$	703	$	(750)	$	1,346	$	134	$	450

(a) Foreign exchange contracts amounts are included in Miscellaneous income, net

(b) Approximately 60% of the fuel commodity contracts amounts are reflected in Cost of goods sold and occupancy costs. The remaining 40% of the amounts are reflected in Store and warehouse operating and selling expenses.

(c) Included in Cost of goods sold and occupancy costs

The existing hedge contracts are highly effective and the ineffective portion is considered immaterial. As of September 29, 2012, the foreign exchange contracts extend through December 2012. Losses currently deferred in OCI are expected to be recognized in earnings within the next twelve months. There were no hedging arrangements requiring collateral. However, we may be required to provide collateral on certain arrangements in the future. The fair values of our foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the agreements at the reporting date, taking into account current exchange rates. The values are based on market-based inputs or unobservable inputs that are corroborated by market data.