Black & Decker 2015 Annual Report Download - page 87

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collateral to guarantee the obligations of holders of Purchase Contracts to purchase Convertible Preferred Stock. Upon
completion of the remarketing, the Notes were released from that pledge arrangement.
The Company successfully remarketed the Notes on November 5, 2015. In connection with the remarketing, the interest rate on
the notes was reset, effective on the November 17, 2015 settlement date of the remarketing, to a rate of 2.45% per annum,
payable semi-annually in arrears on May 17 and November 17 of each year, commencing May 17, 2016. Following settlement
of the remarketing, the Notes remain the Company’s direct, unsecured general obligations subordinated and junior in right of
payment to the Company’s existing and future senior indebtedness, but the Notes rank senior in right of payment to specified
junior indebtedness on the terms and to the extent set forth in the indentures governing such junior indebtedness.
The remarketing resulted in proceeds of $632.5 million. The Company did not directly receive any proceeds from the
remarketing. Instead, the proceeds of remarketing were automatically applied to satisfy in full the related unit holders’
obligations to purchase Convertible Preferred Stock under their Purchase Contracts.
Interest expense of $1.9 million was recorded for 2015, related to the contractual interest coupon on the 2018 Subordinated
Notes based upon the 2.45% annual rate and $23.3 million was recorded in 2015 and $26.9 million each for 2014 and 2013,
related to the contractual interest coupon on the Notes based upon the 4.25% annual rate.
The unamortized deferred issuance cost of the Notes was $5.0 million at January 2, 2016, and will be recorded to interest
expense over the term of the underlying Notes.
Equity Option:
In order to offset the common shares that were 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 was approximately 60% higher than the closing price
of the common stock on November 1, 2010. 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. On August 5, 2015, the Company terminated the
capped call options on its common stock and received 1,692,778 shares of common stock.
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, "Derivatives and Hedging", 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.