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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-06-03 compared with 2021-12-09 · 45 added, 27 removed, 11 unchanged (87% of the section changed)

2 unchanged sentences

We currently do not engage in any interest rate hedging activity and we have no intention to do so in the foreseeable future.

We are subject to interest rate risk in connection with borrowings under the ABL Credit Agreement and the Term Loan Credit Agreement, in each case bearing interest at variable rates and we may incur additional indebtedness that bears interest at variable rates.

As of October 30, 2021, we had no outstanding borrowings under the revolving line of credit and $2,000 million outstanding under the Term Loan Credit Agreement.

FINANCIAL INFORMATION

2022 FIRST QUARTER FORM 10-Q | 47

We are subject to interest rate risk in connection with borrowings under the ABL Credit Agreement and the Term Loan Credit Agreement, as amended, in each case bearing interest at variable rates and we may incur additional indebtedness that bears interest at variable rates.

The Federal Reserve continued increasing short-term interest rates in the first quarter of 2022, compared to the historically low levels in the same period in 2021 and there is widespread expectation in the market for rate increases to continue during the remainder of 2022.

Such interest rate increases, if they continue, may increase the interest rate applicable to our borrowings that have rates that are subject to adjustment pursuant to floating rate indices such as LIBOR or SOFR.

As of April 30, 2022, we had no outstanding borrowings under the revolving line of credit and $1,990 million outstanding under the Term Loan Credit Agreement.

In May, 2022, we issued an additional $500 million in principal amount of term debt under the Term Loan Credit Agreement, as amended.

The ABL Credit Agreement provides for a borrowing amount based on the value of eligible collateral and a formula linked to certain borrowing percentages based on certain categories of collateral.

Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the ABL Credit Agreement as of October 30, 2021 was $333.7 million, net of $19.9 million in outstanding letters of credit.

Based on the average interest rate on the revolving line of credit and the Term Loan during the three months ended October 30, 2021, and to the extent that borrowings were outstanding under any facility, 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.

Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the ABL Credit Agreement as of April 30, 2022 was $444 million, net of $20 million in outstanding letters of credit.

Based on the average interest rate on the revolving line of credit under the ABL Credit Agreement and the Term Loan under the Term Loan Credit Agreement during the three months ended April 30, 2022, and to the extent that borrowings were outstanding under any facility, 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.

To the extent that we incur additional indebtedness, we may increase our exposure to risk from interest rate fluctuations.

A number of our current debt agreements, including the ABL Credit Agreement and the Term Loan Credit Agreement, have an interest rate tied to LIBOR, which is expected to be discontinued after 2021.

A number of alternatives to LIBOR have been proposed or are being developed, but it is not clear which, if any, will be adopted.

Any of these alternative methods may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.

As of October 30, 2021, we had $128 million principal amount of 0.00% convertible senior notes due 2023 outstanding (the “2023 Notes”).

Following announcements by the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, and the Intercontinental Exchange Benchmark Administration, the administrator of LIBOR, publication of 1-week and 2-month U.S.

Dollar LIBOR settings and all tenors for other currencies ceased after December 31, 2021.

While publication of the remaining U.S.

Dollar settings (overnight and 1, 3, 6 and 12 month U.S.

Dollar LIBOR) is expected to cease after June 20, 2023.

banking and other global financial services regulators have directed regulated institutions to cease entering into new LIBOR-based contracts as soon as practicable and in any event by the end of 2021.

A number of our current debt facilities entered into prior to the end of 2021, including the facilities under the ABL Credit Agreement and the Term Loan Credit Agreement, have an interest rate tied to LIBOR.

At this time, it is not possible to predict the effect of transitioning from LIBOR.

SOFR, which is currently published by the Federal Reserve Bank of New York based on overnight U.S.

Treasury repurchase agreement transactions, has been recommended as the alternative to LIBOR by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York and is provided as an alternative rate for our current debt facilities having an interest rate tied to LIBOR.

However, SOFR or any other alternative rates may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.

We intend to continue to evaluate and monitor the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR and ensuring operational processes are updated to accommodate alternative rates.

Due to uncertainty surrounding alternative rates, we are unable to predict the overall impact of this change at this time.

As of April 30, 2022, we had $20 million principal amount of 0.00% convertible senior notes due 2023 outstanding (the “2023 Notes”).

As this instrument does not bear interest, we do not have interest rate risk exposure related to this debt.

As of October 30, 2021, we had $283 million principal amount of 0.00% convertible senior notes due 2024 outstanding (the “2024 Notes”).

As of April 30, 2022, we had $81 million principal amount of 0.00% convertible senior notes due 2024 outstanding (the “2024 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 2023

In connection with the issuance of the 2023 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties.

The convertible note hedge transactions relate to, collectively, 1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the 2023 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2023 Notes.

These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2023 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2023 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 $309.84 per share.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

Foreign Currency Risk

Our revenues are predominately denominated in U.S.

dollars, and accordingly, our net revenues are not currently subject to significant foreign currency risk.

However, as we are currently expanding our operations into select European markets, fluctuations in foreign currency exchange rates are beginning to impact our results of operations.

Certain of our operating expenses are denominated in the currencies of the countries in which our operations exist or are expanding, and accordingly, we have exposure to adverse movements in foreign currency exchange rates, particularly changes in the Pound sterling, Euro and Canadian Dollar, as our international operations are translated from local currency, or functional currency, into U.S.

dollars upon consolidation.

Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of income, which are presented in other income—net on the consolidated statements of income.

We minimize this exposure by managing cash balances at levels appropriate to meet forthcoming expenses in U.S.

dollars and applicable foreign currencies.

FINANCIAL INFORMATION

2021 THIRD QUARTER FORM 10-Q | 57

0.00% Convertible Senior Notes due 2024

In connection with the issuance of the 2024 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties.

The convertible note hedge transactions relate to, collectively, 1.7 million shares of our common stock, which represents the number of shares of our common stock underlying the 2024 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2024 Notes.

These convertible note hedge transactions are expected to reduce the potential earnings dilution with respect to our common stock upon conversion of the 2024 Notes and/or reduce our exposure to potential cash or stock payments that may be required upon conversion of the 2024 Notes.

2022 FIRST QUARTER FORM 10-Q | 48

To date, we have not engaged in foreign currency hedging transactions because our foreign currency transaction gains and losses have not been material to our consolidated financial statements, but we may begin foreign currency risk management strategies in the future.

Market Price Sensitive Instruments

Convertible Senior Notes

In connection with the issuance of the 2023 Notes and 2024 Notes, we entered into privately-negotiated convertible note hedge transactions with certain counterparties.

The strike price of the warrant transactions is initially $338.24 per share.

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements.

D uring the first quarter of fiscal 2022, we have entered into agreements to repurchases $180 million in aggregate principal amount of convertible senior notes consisting of approximately $45 million and $135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively.

In addition to such notes repurchase, we have also terminated all of the remaining bond hedges as well as all of the outstanding warrants originally issued in conjunction with the 2023 Notes and the 2024 Notes .

Refer to Note 9— Convertible Senior Notes in our condensed consolidated financial statements for further information on these transactions related to the 2023 Notes and 2024 Notes.

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.

While it is difficult to accurately measure the historical 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 to date.

However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future, including by heightened levels of inflation that were being experienced globally at the end of our first fiscal quarter.

We may be unable to overcome these issues through measures such as price increases for our products.

Risks related to inflation could include increased costs for many products and services that are necessary for the operation of our business, as well as the impact of interest rate increases, which could have among other consequences a negative effect on the housing market and impact to consumer demand for our products.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk