Black & Decker 2014 Annual Report Download - page 26

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• the impact of an event (individual country default or break up of the Euro) could have an adverse impact on the global
credit markets and global liquidity potentially impacting the Company’s ability to access these credit markets and to
raise capital.
The Company is exposed to market risk from changes in foreign currency exchange rates which could negatively impact
profitability.
The Company manufactures and sells its products in many countries throughout the world. As a result, there is exposure to
foreign currency risk as the Company enters into transactions and makes investments denominated in multiple currencies. The
Company’s predominant exposures are in European, Canadian, British, Australian, Latin American, and Asian currencies,
including the Chinese Renminbi (“RMB”) and the Taiwan Dollar. In preparing its financial statements, for foreign operations
with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, and
income and expenses are translated using weighted-average exchange rates. With respect to the effects on translated earnings, if
the U.S. dollar strengthens relative to local currencies, the Company’s earnings could be negatively impacted. In 2014,
translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings by approximately $85 million
and diluted earnings per share by approximately $0.42. The translational and transactional impacts will vary over time and
may be more material in the future. Although the Company utilizes risk management tools, including hedging, as it deems
appropriate, to mitigate a portion of potential market fluctuations in foreign currencies, there can be no assurance that such
measures will result in all market fluctuation exposure being eliminated. The Company does not make a practice of hedging its
non-U.S. dollar earnings.
The Company sources many products from China and other Asian low-cost countries for resale in other regions. To the extent
the RMB or other currencies appreciate, the Company may experience cost increases on such purchases. The Company may not
be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus its
profitability may be adversely impacted.
The Company has incurred, and may incur in the future, significant indebtedness, or issue additional equity securities, in
connection with mergers or acquisitions which may impact the manner in which it conducts business or the Company’s
access to external sources of liquidity. The potential issuance of such securities may limit the Company’s ability to
implement elements of its growth strategy and may have a dilutive effect on earnings.
As described in Note H, Long-Term Debt and Financing Arrangements, of the Notes to Consolidated Financial Statements in
Item 8, the Company has a five year $1.5 billion committed credit facility. No amounts were outstanding against this facility at
January 3, 2015.
The instruments and agreements governing certain of the Company’s current indebtedness contain requirements or restrictive
covenants that include, among other things:
• a limitation on creating liens on certain property of the Company and its subsidiaries;
• a restriction on entering into certain sale-leaseback transactions;
• customary events of default. If an event of default occurs and is continuing, the Company might be required to repay
all amounts outstanding under the respective instrument or agreement; and
• maintenance of a specified financial ratio. The Company has an interest coverage covenant that must be maintained to
permit continued access to its committed revolving credit facilities. The interest coverage ratio tested for covenant
compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest
Expense (“adjusted EBITDA”/”adjusted Interest Expense”); such adjustments to interest or EBITDA include, but are
not limited to, removal of non-cash interest expense, certain restructuring and other merger and acquisition-related
charges as well as stock-based compensation expense. The ratio required for compliance is 3.5 times EBITDA to 1.0
times Interest Expense and is computed quarterly, on a rolling twelve months (last twelve months) basis. Under this
covenant definition, the interest coverage ratio was approximately 8 times EBITDA or higher in each of the 2014
quarterly measurement periods. Management does not believe it is reasonably likely the Company will breach this
covenant. Failure to maintain this ratio could adversely affect further access to liquidity.
Future instruments and agreements governing indebtedness may impose other restrictive conditions or covenants. Such
covenants could restrict the Company in the manner in which it conducts business and operations as well as in the pursuit of its
growth and repositioning strategies.