Restoration Hardware 2014 Annual Report Download - page 74

Item 7A. Quantitative and Qualitative Disclosure of Market Risks
Interest Rate Risk
Our investments include cash, cash equivalents and both short-term and long-term investments including
investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial
paper, municipal and government agency obligations and guaranteed obligations of the U.S. government. The
primary objective of our investment activities is to preserve principal while maximizing income without
significantly increasing risk. We do not enter into investments for trading or speculative purposes. Our
investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income
and the fair market value of our investments. We believe that our exposure to interest rate risk is not significant
and a 1% movement in market interest rates would not have a significant impact on the total value of our
portfolio. We actively monitor changes in interest rates.
We are subject to interest rate risk in connection with borrowings under our revolving line of credit which
bears interest at variable rates. At January 31, 2015, there were no amounts outstanding under the revolving line
of credit. As of January 31, 2015, we had $401.3 million undrawn borrowing availability under the revolving line
of credit and had $20.2 million in outstanding letters of credit. We currently do not engage in any interest rate
hedging activity and we have no intention to do so in the foreseeable future. Based on the average interest rate on
the revolving line of credit during the year ended January 31, 2015, and to the extent that borrowings were
outstanding, we do not believe that a 10% change in the interest rate would have a material effect on our
consolidated results of operations or financial condition.
As of January 31, 2015, we had $350 million principal amount of 0.00% convertible senior notes due 2019
outstanding (the “Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure
related to this debt.
Market Price Sensitive Instruments
In connection with the issuance of the Notes, we entered into privately-negotiated convertible note hedge
transactions with certain counterparties. The convertible note hedge transactions relate to, collectively,
3.0 million shares of our common stock, which represents the number of shares of our common stock underlying
the Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Notes. These
convertible note hedge transactions are expected to reduce the potential dilution with respect to our common
stock upon conversion of the Notes and/or reduce our exposure to potential cash or stock payments that may be
required upon conversion of the Notes.
We also entered into separate warrant transactions with the same group of counterparties initially relating to
the number of shares of our common stock underlying the convertible note hedge transactions, subject to
customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to our
common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants
unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant
transactions was initially $171.98 per share. Refer to Note 9—Convertible Senior Notes in our condensed
consolidated financial statements.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult
to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the
effects of inflation, if any, on our consolidated results of operations and financial condition have been
immaterial.
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