Restoration Hardware 2015 Annual Report Download - page 63

60
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 30, 2016, there were no amounts outstanding under the revolving line of credit. As of January 30, 2016, we
had $535.4 million undrawn borrowing availability under the revolving line of credit and had $15.0 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 three months ended January 30, 2016, 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 30, 2016, we had $350 million principal amount of 0.00% convertible senior notes due 2019 outstanding (the
“2019 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
As of January 30, 2016, we had $300 million principal amount of 0.00% convertible senior notes due 2020 outstanding (the
“2020 Notes”). As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.
Market Price Sensitive Instruments
0.00% Convertible Senior Notes due 2019
In connection with the issuance of the 2019 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 2019 Notes, subject to anti-dilution adjustments substantially
similar to those applicable to the 2019 Notes. These convertible note hedge transactions are expected to reduce the potential earnings
dilution with respect to our common stock upon conversion of the 2019 Notes and/or reduce our exposure to potential cash or stock
payments that may be required upon conversion of the 2019 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 is initially $171.98 per share. Refer to Note 9—Convertible Senior Notes in our consolidated
financial statements.
0.00% Convertible Senior Notes due 2020
In connection with the issuance of the 2020 Notes, we entered into privately-negotiated convertible note hedge transactions with
certain counterparties. The convertible note hedge transactions relate to, collectively, 5.1 million shares of our common stock, which
represents the number of shares of our common stock underlying the 2020 Notes, subject to anti-dilution adjustments substantially
similar to those applicable to the 2020 Notes. These convertible note hedge transactions are expected to reduce the potential earnings
dilution with respect to our common stock upon conversion of the 2020 Notes and/or reduce our exposure to potential cash or stock
payments that may be required upon conversion of the 2020 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 is initially $189.00 per share. Refer to Note 9—Convertible Senior Notes in our consolidated
financial statements.