Graco 2012 Annual Report Download - page 79

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Convertible Notes
In March 2009, the Company issued $345.0 million of Convertible Notes. The Convertible Notes bear interest at a rate of 5.5%
per year, which is payable semiannually, and the Convertible Notes mature on March 15, 2014. The Convertible Notes are
convertible at an initial conversion rate of 116.198 shares of the Company’s common stock per $1,000 principal amount of
Convertible Notes (representing an initial conversion price of approximately $8.61 per share of common stock), subject to
adjustment in certain circumstances. Upon conversion, a holder will receive cash up to the aggregate principal amount of the
Convertible Notes converted, and cash, shares of common stock or a combination thereof (at the Company’s election) in respect
of the conversion value above the Convertible Notes’ principal amount, if any. The Company entered into convertible note hedge
transactions upon issuance to reduce the Company’s cost of the conversion option (see Footnote 10).
Accounting standards require the Company, as issuer of the Convertible Notes, to separately account for the liability and equity
components of the Convertible Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate at the date of
issuance when interest cost is recognized in subsequent periods. The Company allocated $69.0 million of the $345.0 million
principal amount of the Convertible Notes to the equity component, which represents a discount to the debt to be amortized into
interest expense using the effective interest method through the maturity of the Convertible Notes. Accordingly, the Company’s
effective interest rate on the Convertible Notes was 10.8%.
In connection with the Capital Structure Optimization Plan, in September 2010 the Company completed an exchange of newly
issued shares of common stock and cash for $324.7 million of the $345.0 million outstanding principal amount of the Convertible
Notes (the “Exchange Offer”). In the aggregate, the Company paid $52.0 million in cash and issued 37.7 million shares of the
Company’s common stock for $324.7 million principal amount of the Convertible Notes validly offered for exchange by the
holders pursuant to the Exchange Offer. In accordance with the applicable authoritative accounting guidance, the Company
determined the fair value of the liability component of the Convertible Notes received in the Exchange Offer, with the residual
value representing the equity component. The excess of the fair value of the liability component, or $356.0 million, over the
carrying value of the Convertible Notes exchanged, $275.5 million, was recognized as a loss related to the extinguishment of debt.
Including fees incurred associated with the Exchange Offer and the write-off of unamortized issuance costs, the Company recorded
a pretax loss of $87.2 million upon the settlement of the Exchange Offer, which is included in losses related to extinguishments
of debt in the Consolidated Statement of Operations for 2010.
In March 2011, the Company completed exchanges of newly issued shares of common stock and cash for an additional $20.0
million outstanding principal amount of Convertible Notes. The Company paid $3.1 million in cash and issued 2.3 million shares
of the Company’s common stock for the $20.0 million principal amount of Convertible Notes. The Company determined that the
fair value of total consideration (including cash) paid to the holders of Convertible Notes, using the fair market value of common
stock at settlement, was $47.4 million. In accordance with the applicable authoritative accounting guidance, the Company
determined the fair value of the liability component of the Convertible Notes received, with the residual value representing the
equity component. The excess of the fair value of the liability component, or $21.8 million, over the carrying value of the Convertible
Notes exchanged, $17.3 million, was recognized as a loss related to the extinguishment of debt in 2011. Including the write-off
of unamortized issuance costs, the Company recorded a pretax loss of $4.8 million, which is included in loss related to
extinguishment of debt in the Consolidated Statement of Operations for 2011. During 2011, in addition to the March 2011 exchanges,
the Company also exchanged an additional $0.2 million principal amount of the Convertible Notes generally based on the same
terms and conditions as offered to the holders of the Convertible Notes in previous exchanges. As of December 31, 2012, $0.1
million principal amount of the Convertible Notes remained outstanding.
Junior Convertible Subordinated Debentures
In 1997, a 100% owned finance subsidiary (the “Subsidiary”) of the Company issued 10.0 million shares of 5.25% convertible
preferred securities (the “Preferred Securities”). Holders of the Preferred Securities were entitled to cumulative cash dividends
of 5.25% of the liquidation preference of $50 per Preferred Security, or $2.625 per year. Each of these Preferred Securities was
convertible into 0.9865 of a share of the Company’s common stock. During 2005 and 2004, the Company purchased an aggregate
of 1.6 million shares of its Preferred Securities from holders at an average price of $45.27 per share ($71.3 million).
The proceeds received by the Subsidiary from the issuance of the Preferred Securities were invested in the Company’s 5.25%
Junior Convertible Subordinated Debentures (the “Debentures”), with a scheduled maturity date of December 1, 2027. In addition,
the Subsidiary received approximately $15.5 million of the Company’s Debentures as payment for $15.5 million the Company
borrowed from the Subsidiary to purchase all of the common equity interests in the Subsidiary. As a result, the Company issued
an aggregate of $515.5 million of Debentures, and the Subsidiary was the sole holder of the Debentures.
During 2012, the Company redeemed the $436.7 million of remaining outstanding Debentures. Because the Preferred Securities
were mandatorily redeemable upon the retirement of the Debentures at maturity or upon acceleration of the Debentures, the
Preferred Securities were concurrently redeemed at 100% of the liquidation preference of $421.2 million. In conjunction with the
redemption of the Debentures and the Preferred Securities, the Company received cash proceeds of $15.5 million representing