ADT 2008 Annual Report Download - page 182

Foreign Currency Exposures
We hedge our exposure to fluctuations in exchange rates through the use of forward foreign
exchange contracts and options. During 2008, our largest exposures to foreign exchange rates existed
primarily with the British Pound, Euro, Australian Dollar and Canadian Dollar against the U.S. Dollar.
The market risk related to the forward foreign exchange contracts is measured by estimating the
potential impact of a 10% change in the value of the U.S. Dollar relative to the local currency
exchange rates. The rates used to perform this analysis were based on the market rates in effect on
September 26, 2008. A 10% appreciation of the U.S. dollar relative to the local currency exchange rates
would result in a $57 million net increase in the fair value of the contracts. Conversely, a 10%
depreciation of the U.S. dollar relative to the local currency exchange rates would result in a
$69 million net decrease in the fair value of the contracts. However, gains or losses on these derivative
instruments are economically offset by the gains or losses on the underlying transactions.
Previously, we hedged our investment in certain foreign operations. In December 2006, due to
required changes to the legal entity structure to facilitate the Separation, the Company determined that
it would 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
were recorded in the income statement subsequent to this determination rather than in the currency
translation component of shareholders’ equity. Forward contracts that were previously designated as
hedges of these net investments continued to be used to manage this exposure but were no longer
designated as net investment hedges.
Also in connection with the Separation and the debt tender, the Company re-designated its 6.125%
Euro denominated public notes due 2007 on March 29, 2007, its 5.5% Euro denominated public notes
due 2008 and its 6.5% British Pound denominated public notes due 2031 on May 21, 2007, that had
previously been considered as hedges of net investments in certain foreign operations. At
September 26, 2008 and September 28, 2007, the Company did not hedge its net investment in foreign
operations, we had no net investment hedges and all of its outstanding borrowings were denominated
in U.S. dollars.
During 2008, we designated certain intercompany loans as permanent in nature, in the amount of
$2.1 billion as of September 26, 2008. As a result, the Company recorded $141 million of cumulative
translation adjustment through accumulated other comprehensive income as of September 26, 2008
related to these loans.
Interest Rate Exposures
Our long-term debt portfolio primarily consists of fixed-rate instruments. Historically, the Company
managed its exposure to interest rates by entering into interest rate and cross-currency swaps
designated as fair value hedges. In assessing the potential risks related to movements in interest rates,
we terminated the interest rate and cross-currency swaps in several tranches beginning in the fourth
quarter of 2006. During the first quarter of 2007, we terminated the remaining contracts with a total
notional amount of $0.6 billion, resulting in an aggregate terminated notional amount of $3.1 billion.
The settlement of these swaps resulted in a net cash inflow of $63 million for the first quarter of 2007.
Since the interest rate swaps were designated as hedging instruments of outstanding debt, the related
$32 million loss adjustment reported in 2007 to the carrying value of the related debt will be amortized
over the remaining life of the related debt instruments. Of this amount, $3 million and $18 million
have been amortized in 2008 and 2007, respectively. In connection with the debt tender offer,
$9 million of unamortized loss on interest rate swaps was accelerated and recorded in 2007 as a loss on
retirement of debt and included in other expense, net (see Note 13 to the Consolidated Financial
Statements). At September 28, 2007, there were no interest rate swaps outstanding. During 2008, the
Company did not enter into any interest rate or cross-currency swaps, but may consider such strategies
in the future.
2008 Financials 79