ADT 2006 Annual Report Download - page 132

changes in rules and regulations regarding the retirement and disposal of certain electrical
products;
• the possible effects on Tyco of future legislation in the U.S. that may limit or eliminate potential
U.S. tax benefits resulting from Tyco’s incorporation in Bermuda or deny U.S. government
contracts to Tyco based upon its incorporation in Bermuda; and
• the potential distraction costs associated with negative publicity relating to actions of our former
senior corporate management.
Additionally, there are several factors and assumptions that could affect the Company’s plan to
separate into three independent entities, our future results and cause actual results to differ materially
from those expressed in our forward looking statements:
• increased demands on the Company’s management team as a result of the Proposed Separation;
• changes in business, political and economic conditions in the U.S. and in other countries in
which the Company currently does business;
• changes in governmental regulations and policies and actions of regulatory bodies;
• changes in operating performance;
• required changes to existing financings, and changes in credit ratings, including those that may
result from the Proposed Separation;
• the Company’s ability to obtain the financing necessary to consummate the Proposed Separation;
and
• the Company’s ability to satisfy certain conditions precedent, including final approval by the Tyco
Board of Directors, receipt of certain tax rulings, necessary opinions of counsel and the filing
and effectiveness of registration statements with the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in interest rates and foreign currency
exchange rates. In order to manage the volatility relating to our more significant market risks, we enter
into forward foreign currency exchange contracts, cross-currency swaps, foreign currency options, and
interest rate swaps. We do not anticipate any material changes in our primary market risk exposures in
2007. In assessing the current and future risk related to movements in interest rates, we terminated the
interest rate and cross currency swaps in several tranches. The aggregate notional value of the interest
rate and cross currency swaps terminated during the fourth quarter of 2006 was $2.5 billion. In
October 2006, we terminated the remaining contracts with a total notional amount of $0.6 billion. The
settlement of these swaps resulted in a net cash inflow of $55 million. Since the interest rate swaps
were designated as hedging instruments of outstanding debt, the related $32 million loss adjustment to
the carrying value of the related debt will be amortized over the remaining life of the related debt
instruments.
In December 2006, due to required changes to the legal entity structure to facilitate the Proposed
Separation, the Company determined that it will no longer consider certain intercompany foreign
currency transactions to be long-term investments. As a result, the related foreign currency transaction
gains and losses on such investments will be recorded in the income statement rather than to the
currency translation component of shareholders’ equity. Forward contracts that were previously
designated as hedges of these net investments will continue to be used to manage this exposure but will
no longer be designated as net investment hedges.
70 2006 Financials