Graco 2009 Annual Report Download - page 62

Newell Rubbermaid Inc. 2009 Annual Report
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FOOTNOTE 10
CONVERTIBLE NOTE HEDGE AND WARRANT TRANSACTIONS
In connection with the issuance of the Convertible Notes, the Company entered into separate convertible note hedge transactions and warrant transactions
with respect to the Company’s common stock to minimize the impact of the potential dilution upon conversion of the Convertible Notes. The Company
purchased call options in private transactions to cover 40.1 million shares of the Company’s common stock at an exercise price of $8.61 per share, subject
to adjustment in certain circumstances, for $69.0 million. The call options generally allow the Company to receive shares of the Company’s common stock
from counterparties equal to the number of shares of common stock payable to the holders of the Convertible Notes upon conversion. These call options will
terminate the earlier of the maturity date of the related Convertible Notes or the first day all of the related Convertible Notes are no longer outstanding due
to conversion or otherwise. As of December 31, 2009, the estimated fair value of the call options was $306.7 million.
The Company also sold warrants permitting the purchasers to acquire up to 40.1 million shares of the Company’s common stock at an exercise price
of $11.59 per share, subject to adjustment in certain circumstances, in private transactions for total proceeds of $32.7 million. The warrants expire over a
period of seventy-five trading days beginning on June 13, 2014 and are European-style warrants (exercisable only upon expiration). For each warrant that is
exercised, the Company will deliver to the counterparties a number of shares of the Company’s common stock equal to the amount by which the Company’s
stock price exceeds the exercise price, divided by the stock price. The Company will not be required to deliver a number of the Company’s shares in connection
with the net settlement of the warrants in excess of the aggregate number of shares subject to the warrants, or 40.1 million shares of the Company’s common
stock. As of December 31, 2009, the estimated fair value of the warrants to the holders was $238.9 million.
The Company has analyzed the convertible note hedge transactions and warrant transactions under the applicable authoritative guidance, and the
Company determined that they meet the criteria for classification as equity transactions. As a result, the Company recorded the purchase of the call options
as a reduction in additional paid-in capital, net of tax, and the proceeds from the warrants as an increase to additional paid-in capital, and the Company
does not recognize subsequent changes in the fair value of the instruments in its financial statements.
FOOTNOTE 11
DERIVATIVE FINANCIAL INSTRUMENTS
The use of financial instruments, including derivatives, exposes the Company to market risk related to changes in interest rates, foreign currency exchange
rates and commodity prices. The Company enters into interest rate swaps related to debt obligations with maturity dates ranging from five to ten years.
The Company uses interest rate swap agreements to manage its interest rate exposure and to achieve a desired proportion of variable and fixed-rate debt.
These derivatives are designated as fair value hedges based on the nature of the risk being hedged. The Company also uses derivative instruments, such as
forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting
from changes in foreign currency exchange rates. The Company’s foreign exchange risk management policy generally emphasizes hedging transaction
exposures of one-year duration or less and hedging foreign currency intercompany financing activities with derivatives with maturity dates of one year or less.
The Company uses derivative instruments to hedge various foreign exchange exposures, including the following: (i) variability in foreign currency-denominated
cash flows, such as the hedges of inventory purchases for products produced in one currency and sold in another currency and (ii) currency risk associated
with foreign currency-denominated operating assets and liabilities, such as forward contracts and other instruments that hedge cash flows associated with
intercompany financing activities. Additionally, the Company purchases certain raw materials which are subject to price volatility caused by unpredictable
factors. Where practical, the Company uses derivatives as part of its commodity risk management process. The Company reports its derivative positions in
the Consolidated Balance Sheets on a gross basis and does not net asset and liability derivative positions with the same counterparty. The Company monitors
its positions with, and the credit quality of, the financial institutions that are parties to its financial transactions.
Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and
designation of the derivative instrument. For a derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on the derivative
as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. For derivative instruments that
are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is initially reported as a component of accumulated
other comprehensive income (loss) (“AOCI”), net of tax, and is subsequently reclassified into earnings when the hedged transaction affects earnings. The
ineffective portion of the gain or loss is recognized in current earnings. For derivatives designated as qualifying hedges of net investments, the gain or loss
on the instruments is recognized in AOCI. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting
purposes are recognized currently in earnings, and such amounts were not material for the year ended December 31, 2009.