ADT 2008 Annual Report Download - page 242

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Financial Instruments (Continued)
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 during the first
quarter of 2007.
Interest Rate Exposures
The Company historically utilized interest rate swap agreements to manage its exposure to interest
rate risk. During the first quarter of 2007, the Company terminated the interest rate swaps. Since the
interest rate swaps were designated as hedging instruments of outstanding debt, the related loss will be
amortized over the remaining life of the related debt instruments. Prior to termination, 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 historically utilized 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. During the first quarter of 2007, the Company terminated these
agreements. The settlement of the swaps terminated during the first quarter of 2007 along with
$17 million of swaps in a net gain position that were terminated in the fourth quarter of 2006 resulted
in a net cash inflow of $63 million in the first quarter of 2007. In connection with the debt tender offer,
$9 million of unamortized loss on interest rate swaps was accelerated and recorded as a loss on
retirement of debt and included in other expense, net. See Note 13. At September 26, 2008 and
September 28, 2007, there were no cross-currency or interest rate swaps outstanding. Prior to
termination, the mark-to-market effects on the interest rate and foreign currency swaps were recorded
in interest expense and selling, general and administrative expenses, 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
Tyco uses various options, swaps, and forwards not designated as hedging instruments, to manage
foreign currency exposures on accounts and notes receivable, accounts payable, intercompany loans and
forecasted transactions denominated in certain foreign currencies. For derivatives not designated as
hedging instruments, the Company records changes in fair value in selling, general and administrative
expenses in the income statement in the period of change. The fair value of these instruments totaled
$25 million and $95 million at September 26, 2008 and September 28, 2007, respectively.
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. The remaining forward and option contracts
2008 Financials 139