Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of January 29, 2022, our exposure to market risk was primarily from interest rate changes on our debt obligations and short-term investments, some of which are at a London Interbank Offered Rate (LIBOR). Our interest rate exposure is primarily due to differences between our floating rate debt obligations compared to our floating rate short-term investments. As of January 29, 2022, our floating rate short-term investments exceeded our floating rate debt by approximately $3.5 billion. Based on our balance sheet position as of January 29, 2022, the annualized effect of a 0.1 percentage point increase in floating interest rates on our floating rate debt obligations, net of our floating rate short-term investments, would increase our earnings before income taxes by $3 million. In general, we expect our floating rate debt to exceed our floating rate short-term investments over time, but that may vary in different interest rate and economic environments. For example, our short-term investments as of January 29, 2022, exceeded our floating rate debt due to operating cash flow acceleration driven by strong operating results. See further description of our debt and derivative instruments in Notes 16 and 17 to the Financial Statements.
The United Kingdom's Financial Conduct Authority has announced the intent to phase out LIBOR by June 2023. We do not expect the phase out to materially impact our financial statements, liquidity, or access to capital markets.
We record our general liability and workers' compensation liabilities at net present value; therefore, these liabilities fluctuate with changes in interest rates. Based on our balance sheet position as of January 29, 2022, the annualized effect of a 0.5 percentage point increase/(decrease) in interest rates would increase/(decrease) earnings before income taxes by $6 million.
In addition, we are exposed to market return fluctuations on our qualified defined benefit pension plan. The value of our pension liabilities is inversely related to changes in interest rates. A 1 percentage point decrease in the weighted average discount rate would increase annual expense by $62 million. To protect against declines in interest rates, we hold high-quality, long-duration bonds and derivative instruments in our pension plan trust. As of January 29, 2022, we had hedged 70 percent of the interest rate exposure of our plan liabilities.
TARGET CORPORATION
2021 Form 10-K 32
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
QUANTITATIVE AND QUALITATIVE DISCLOSURES Index to Financial Statements
As more fully described in Note 23 to the Financial Statements, we are exposed to market returns on accumulated team member balances in our nonqualified, unfunded deferred compensation plans. We control the risk of offering the nonqualified plans by making investments in life insurance contracts and prepaid forward contracts on our own common stock that substantially offset our economic exposure to the returns on these plans.
There have been no other material changes in our primary risk exposures or management of market risks since the prior year.
TARGET CORPORATION
2021 Form 10-K 33
FINANCIAL STATEMENTS Table of Contents
INDEX Index to Financial Statements