Black & Decker 2015 Annual Report Download - page 48

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combined translational and transactional impact, on pre-tax earnings, of a 10% overall movement in exchange rates is
approximately $132 million, or approximately $0.68 per diluted share. In 2015, translational and transactional foreign currency
fluctuations negatively impacted pre-tax earnings by approximately $220 million and diluted earnings per share by
approximately $1.13.
The Company’s exposure to interest rate risk results from its outstanding debt and derivative obligations, short-term
investments, and derivative financial instruments employed in the management of its debt portfolio. The debt portfolio
including both trade and affiliate debt, is managed to achieve capital structure targets and reduce the overall cost of borrowing
by using a combination of fixed and floating rate debt as well as interest rate swaps, and cross-currency swaps.
The Company’s primary exposure to interest rate risk comes from its floating rate debt and derivatives in the U.S. and is fairly
represented by changes in LIBOR rates. At January 2, 2016, the impact of a hypothetical 10% increase in the interest rates
associated with the Company’s floating rate derivative and debt instruments would have an immaterial effect on the Company’s
financial position and results of operations.
The Company has exposure to commodity prices in many businesses, particularly brass, nickel, resin, aluminum, copper, zinc,
steel, and energy used in the production of finished goods. Generally, commodity price exposures are not hedged with
derivative financial instruments, but instead are actively managed through customer product and service pricing actions,
procurement-driven cost reduction initiatives and other productivity improvement projects.
Fluctuations in the fair value of the Company’s common stock affect domestic retirement plan expense as discussed below in
the Employee Stock Ownership Plan section of MD&A. Additionally, the Company has $59 million of liabilities as of January
2, 2016 pertaining to unfunded defined contribution plans for certain U.S. employees for which there is mark-to-market
exposure.
The assets held by the Company’s defined benefit plans are exposed to fluctuations in the market value of securities, primarily
global stocks and fixed-income securities. The funding obligations for these plans would increase in the event of adverse
changes in the plan asset values, although such funding would occur over a period of many years. In 2015, 2014 and 2013,
there was an $11.0 million decrease and $285 million and $102 million increase, respectively, in investment returns on pension
plan assets. The Company expects funding obligations on its defined benefit plans to be approximately $52 million in 2016.
The Company employs diversified asset allocations to help mitigate this risk. Management has worked to minimize this
exposure by freezing and terminating defined benefit plans where appropriate.
The Company has access to financial resources and borrowing capabilities around the world. There are no instruments within
the debt structure that would accelerate payment requirements due to a change in credit rating.
The Company’s existing credit facilities and sources of liquidity, including operating cash flows, are considered more than
adequate to conduct business as normal. Accordingly, based on present conditions and past history, management believes it is
unlikely that operations will be materially affected by any potential deterioration of the general credit markets that may occur.
The Company believes that its strong financial position, operating cash flows, committed long-term credit facilities and
borrowing capacity, and ready access to equity markets provide the financial flexibility necessary to continue its record of
annual dividend payments, to invest in the routine needs of its businesses, to make strategic acquisitions and to fund other
initiatives encompassed by its growth strategy and maintain its strong investment grade credit ratings.
OTHER MATTERS
Employee Stock Ownership Plan As detailed in Note L, Employee Benefit Plans, the Company has an ESOP under which the
ongoing U.S. Core and 401(k) defined contribution plans are funded. Overall ESOP expense is affected by the market value of
the Company’s stock on the monthly dates when shares are released, among other factors. The Company’s net ESOP activity
resulted in expense of $0.8 million in 2015, $0.7 million in 2014, and $1.9 million in 2013. ESOP expense could increase in the
future if the market value of the Company’s common stock declines.
CRITICAL ACCOUNTING ESTIMATES — Preparation of the Company’s Consolidated Financial Statements requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Significant accounting policies used in the preparation of the Consolidated Financial Statements are described in Note A,
Significant Accounting Policies. Management believes the most complex and sensitive judgments, because of their significance
to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters with
inherent uncertainty. The most significant areas involving management estimates are described below. Actual results in these
areas could differ from management’s estimates.