ADT 2006 Annual Report Download - page 191

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Financial Instruments (Continued)
result in a significant loss to the Company if a counterparty failed to perform according to the terms of
its agreement. At this time, the Company does not require collateral or other security to be furnished
by the counterparties to its derivative financial instruments.
In assessing the current and potential future risk attributable to interest rate movements, during
the fourth quarter of 2006, the Company terminated interest rate swaps and cross currency agreements
with an aggregate notional value of $2.5 billion. The fair value of the swaps at the time of termination
was a net gain of $10 million. As the interest rate swaps were designated as hedging instruments of
outstanding debt, the net deferred loss of $26 million will be recognized in earnings over the remaining
term of the related debt instrument. The remaining agreements were terminated subsequent to the end
of 2006.
Interest Rate Exposures
The Company enters into interest rate swap agreements to manage its exposure to interest rate
risk. Under these agreements, the Company receives a fixed rate of interest of 6.4% and pays a floating
rate of interest based on six month LIBOR. At September 29, 2006, the Company had interest rate
swaps in a net loss position of $6 million designated as fair value hedges with expiration dates in 2011.
The mark-to-market effects of both the interest rate swap agreements and the underlying debt
obligations were recorded in interest expense and are directly offsetting to the extent the hedges are
effective.
In addition, the Company enters into interest rate and foreign currency swap agreements (‘‘cross
currency swaps’’) to manage its exposure to interest rate risk and foreign currency exposure on loans
denominated in foreign currency. Under these agreements, the Company receives a fixed rate of
interest of 6.5% and pays floating rates of interest based on six month LIBOR. At September 29, 2006,
the Company had interest rate and foreign currency swap agreements in a net gain position of
$52 million designated as a fair value hedge with an expiration date in 2011. The mark-to-market
effects on the interest rate and foreign currency swaps were recorded in interest expense and selling,
general and administrative expense, respectively, and directly offset the corresponding changes in the
fair value of the hedged items to the extent the hedges were effective. The ineffective portion of the
hedge was not material.
Foreign Currency Exposures
The Company hedges its net investment in certain foreign operations. The aggregate notional
value of these hedges was $7.1 billion at September 29, 2006. Included in the cumulative translation
adjustment component of other comprehensive income was a net loss of $91 million and a net gain of
$31 million at September 29, 2006 and September 30, 2005, respectively. Changes in the fair value of
forward contracts qualifying as net investment hedges are reported in the cumulative translation
adjustment component of accumulated other comprehensive income to the extent the hedges are
effective. Amounts excluded from the measure of effectiveness of the net investment hedges totaled
$6 million and were recognized in selling, general and administrative expenses.
The Company uses forward agreements to hedge its exposure to foreign currency exchange rates
on raw material purchases. These forward agreements are designated as cash flow hedges. Gains and
losses resulting from these hedges, the amounts of which are not material in any period presented, are
recorded in other comprehensive income. Amounts are reclassified from other comprehensive income
2006 Financials 129