ADT 2009 Annual Report Download - page 159

management process to monitor, evaluate and manage the principal exposures we believe we are
subject to. We seek to manage these risks through the use of financial derivative instruments. Our
portfolio of derivative financial instruments may, from time to time, include forward foreign currency
exchange contracts, foreign currency options, interest rate swaps and forward commodity contracts.
Derivative financial instruments related to interest rate sensitivity of debt obligations, intercompany
cross border transactions and anticipated non-functional currency cash flows are used with the goal of
mitigating a significant portion of these exposures when it is cost effective to do so.
We do not execute transactions or utilize derivative financial instruments for trading or speculative
purposes. Further, to reduce the risk that a counterparty will be unable to honor its contractual
obligations to us, we only enter into contracts with counterparties having at least an A-/A3 long-term
debt rating. These counterparties are generally financial institutions and there is no significant
concentration of exposure with any one party.
Foreign Currency Exposures
We hedge our exposure to fluctuations in foreign currency exchange rates through the use of
forward foreign currency exchange contracts. During 2009, our largest exposures to foreign exchange
rates existed primarily with the Swiss franc, British pound, Euro, Australian dollar and Canadian dollar
against the U.S. dollar. The market risk related to the forward foreign currency exchange contracts
(excluding the dividend hedge contract discussed below) 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 25, 2009. A 10%
appreciation of the U.S. dollar relative to the local currency exchange rates would result in a $6 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 $7 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.
Effective March 17, 2009, Tyco changed its jurisdiction of incorporation from Bermuda to
Switzerland. Until January 1, 2011 Tyco intends to make dividend payments in the form of a reduction
of capital denominated in Swiss francs. However, the Company expects to actually pay dividends in
U.S. dollars, based on exchange rates in effect shortly before the payment date. Fluctuations in the
value of the U.S. dollar compared to the Swiss franc between the date the dividend is declared and
paid will increase or decrease the U.S. dollar amount required to be paid. The Company manages the
potential variability in cash flows associated with the dividend payments by entering into derivative
financial instruments used as economic hedges of the underlying risk. A 10% appreciation of the U.S.
dollar relative to the Swiss franc would result in a $20 million net decrease in the fair value of the
contracts. Conversely, a 10% depreciation of the U.S. dollar relative to the Swiss franc would result in
a $24 million net increase 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 Consolidated Statements of Operations subsequent to this determination rather
than in the currency translation component of accumulated other comprehensive (loss) income within
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.
During fiscal 2009, we designated certain intercompany loans as permanent in nature. As of
September 25, 2009, $3.0 billion of intercompany loans have been designated as permanent in nature
and for the year ended September 25, 2009, we recorded the cumulative translation loss through
2009 Financials 67