ADT 2010 Annual Report Download - page 210

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Financial Instruments (Continued)
Foreign Currency Exposures
The Company manages foreign currency exchange rate risk through the use of derivative financial
instruments comprised principally of forward contracts on foreign currency, which are not designated as
hedging instruments for accounting purposes. The objective of those derivatives instruments is to
minimize the income statement impact and potential variability in cash flows associated with
intercompany loans and accounts receivable, accounts payable and forecasted transactions that are
denominated in certain foreign currencies. As of September 24, 2010 and September 25, 2009, the total
gross notional amount of the Company’s foreign exchange contracts was $860 million and $525 million,
respectively. Effective March 17, 2009, Tyco changed its jurisdiction of incorporation from Bermuda to
Switzerland. Until the last payment is made in February 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 these 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.
During the third quarter of 2010, the Company hedged its net investment in certain foreign
operations through the use of foreign exchange forward contracts. The objective is to minimize the
exposure to changes in the value of the foreign currency denominated net investment. The aggregate
notional amount of these hedges was approximately $255 million as of September 24, 2010. As of
September 25, 2009, the Company did not hedge any net investments in foreign operations.
Interest Rate Exposures
The Company manages interest rate risk through the use of interest rate swap transactions with
financial institutions acting as principal counterparties, which are designated as fair value hedges for
accounting purposes. During the third quarter of 2009, first quarter of 2010 and third quarter of 2010,
the Company entered into interest rate swap transactions with the objective of managing the exposure
to interest rate risk by converting the interest rates on $1.4 billion, $500 million and $501 million
respectively, of fixed-rate debt to variable rates. In these contracts, the Company agrees with financial
institutions acting as principal counterparties to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional principal amount. In
connection with the redemption of all of the 6.375% public notes due 2011 during the third quarter of
2010, the Company terminated the corresponding interest rate swaps. As of September 24, 2010 and
September 25, 2009, the total gross notional amount of the Company’s interest rate swap contracts was
$1.5 billion and $1.4 billion, respectively.
Commodity Exposures
During fiscal 2010, the Company entered into commodity swaps for copper which are not
designated as hedging instruments for accounting purposes. These swaps did not have a material impact
on the Company’s financial position, results of operations or cash flows.
122 2010 Financials