Black & Decker 2011 Annual Report Download - page 81

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The Company is obligated to repay the principal amount of the $320.0 million of Convertible Notes due May 17, 2012 in cash at
maturity. The Company may elect to settle the conversion option value, if any, at maturity in cash or shares. At December 31, 2011,
the conversion rate on the Convertibles Notes due 2012 was 15.6439 (equivalent to a conversion price set at $63.92 per common
share). Additionally, the Company has a Bond Hedge and Stock Warrants associated with the $320.0 million of Convertible Notes.
Because the Bond Hedge is anti-dilutive, it will not be included in any diluted shares outstanding computation prior to its maturity.
However, at maturity of the Convertible Notes and the Bond Hedge in May 2012, the aggregate effect of these instruments is that
there will be no net increase in the Company’s common shares. The 4.9 million of outstanding Stock Warrants that were issued
contemporaneously with the $320.0 million of Convertible Notes have a strike price of $85.94 (as adjusted for standard anti-dilution
provisions), and are exercisable during the period August 17, 2012 through September 28, 2012. The Stock Warrants will be net share
settled and are deemed to automatically be exercised at their expiration date if they are “in the money” and were not previously
exercised. With respect to the impact on the Company, the Convertible Notes, Bond Hedge and Stock Warrants, when taken together,
result in the economic equivalent of having the conversion price on the Convertible Notes at $85.94 (represented by the Stock Warrant
strike price as of December 31, 2011).
I. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity
prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency
swaps, purchased currency options, foreign exchange contracts and commodity contracts, are used to mitigate interest rate exposure,
foreign currency exposure and commodity price exposure.
Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria
specified in ASC 815, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment
hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed
through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. In the
first quarter of 2010, the Company acquired a portfolio of derivative financial instruments in conjunction with the Merger, which
Black & Decker entered into in the ordinary course of business. At the March 12, 2010 merger date, the Company established its
intent for each derivative. The Company terminated all outstanding interest rate swaps and foreign currency forwards hedging future
purchases of inventory denominated in a foreign currency. For other foreign currency forwards and commodity derivatives, the
Company elected to leave the instruments in place as an economic hedge only and account for them as undesignated. Net investment
hedges were re-designated.
A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets are as follows (in millions):
Balance Sheet
Classification
2011
2010
Balance Sheet
Classification
2011
2010
Derivatives designated as hedging
instruments:
Interest Rate Contracts Cash Flow
.............................
Other current assets
$ —
$ —
Accrued expenses
$ 86.9
$ —
LT other assets
—
—
LT other liabilities
—
17.3
Interest Rate Contracts Fair Value
.............................
Other current assets
21.7
5.5
Accrued expenses
5.2
—
LT other assets
15.2
10.7
LT other liabilities
—
11.9
Foreign Exchange Contracts Cash Flow
....................
Other current assets
5.3
0.7
Accrued expenses
1.4
5.6
LT other assets
—
—
LT other liabilities
0.8
—
Net Investment Hedge
................................
................
Other current assets
27.7
11.7
Accrued expenses
—
17.7
$ 69.9
$ 28.6
$ 94.3
$ 52.5
Derivatives not designated as hedging
instruments:
Foreign Exchange Contracts
................................
Other current assets
$ 48.1
$ 26.4
Accrued expenses
$ 63.4
$ 59.1
LT other assets ................................
...........................
24.5
—
LT other liabilities
24.0
4.1
$ 72.6
$ 26.4
$ 87.4
$ 63.2
The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is
exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset
amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and
does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value
Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying
value of these assets accordingly. The risk of default is considered remote.