Black & Decker 2012 Annual Report Download - page 87

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73
Equity Option:
In order to offset the common shares that may be deliverable upon conversion of shares of Convertible Preferred Stock, the
Company entered into capped call transactions (equity options) with certain major financial institutions (the “capped call
counterparties”). The capped call transactions cover, subject to anti-dilution adjustments, the number of shares of common
stock equal to the number of shares of common stock underlying the maximum number of shares of Convertible Preferred
Stock issuable upon settlement of the Purchase Contracts. Each of the capped call transactions had an original term of
approximately five years and initially has a lower strike price of $75.00, which corresponds to the initial conversion price of the
Convertible Preferred Stock, and an upper strike price of $97.95, which is approximately 60% higher than the closing price of
the common stock on November 1, 2010. At December 29, 2012, the capped call transactions had an adjusted lower strike price
of $74.21 and an adjusted upper strike price of $96.92. The Company paid $50.3 million of cash to fund the cost of the capped
call transactions, which was recorded as a reduction of Shareowners’ Equity. The capped call transactions may be settled by net
share settlement or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified
physical settlement (in which case the number of shares the Company will receive will be reduced by a number of shares based
on the excess, if any, of the volume-weighted average price of its common stock, as measured under the terms of the capped
call transactions, over the upper strike price of the capped call transactions). If the capped call transactions are exercised and
the volume-weighted average price per share of common stock, as measured under the terms of the capped call transactions, is
greater than the lower strike price of the capped call transactions but not greater than the upper strike price of the capped call
transactions, then the value the Company expects to receive from the capped call counterparties will be generally based on the
amount of such excess. As a result, the capped call transactions may offset the potential dilution upon conversion of the
Convertible Preferred Stock. If, however, the volume-weighted average price per share of common stock, as measured under
the terms of the capped call transactions, exceeds the upper strike price of the capped call transactions, the value the Company
expects to receive upon the exercise of the capped call transactions (or portions thereof) will be approximately equal to (x) the
excess of the upper strike price of the capped call transactions over the lower strike price of the capped call transactions times
(y) the number of shares of common stock relating to the capped call transactions (or the portions thereof) being exercised, in
each case as determined under the terms of the capped call transactions. As a result, the dilution mitigation under the capped
call transactions will be limited based on such capped value.
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.
A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets are as follows (in
millions):