ADT 2011 Annual Report Download - page 231

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. 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 the derivative 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 30, 2011 and September 24, 2010, the total gross notional amount
of the Company’s foreign exchange contracts was $836 million and $860 million, respectively.
Effective March 17, 2009, Tyco changed its jurisdiction of incorporation from Bermuda to
Switzerland. Tyco made the final dividend payment in the form of a reduction of capital in February
2011, denominated in Swiss francs (See Note 17). The Company paid dividends in U.S. dollars, based
on the exchange rate 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 was approved and paid
increased or decreased the U.S. dollar amount required to be paid. The Company managed 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. Beginning in May 2011, the
Company makes dividend payments out of contributed surplus in U.S. dollars which has eliminated the
need to use currency hedges for dividend payments.
The Company hedges 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
$224 million and $255 million as of September 30, 2011 and September 24, 2010, respectively. Changes
in the fair value of forward contracts qualifying as net investment hedges are reported in cumulative
translation component of accumulated other comprehensive loss to the extent the hedges are effective.
The ineffective portion of the hedge was not material to the Company’s Consolidated Statement of
Operations for the years ended September 30, 2011, September 24, 2010 and September 25, 2009.
These contracts did not have a material impact to the Company’s Consolidated Balance Sheet as of
September 30, 2011 and September 24, 2010.
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. Since the third quarter of 2009, TIFSA has been entering into interest rate swap
transactions with the objective of managing the exposure to interest rate risk by converting interest
rates of fixed-rate debt to variable rates. During the second quarter of 2011, TIFSA also entered into
interest rate swaps contracts to hedge $155 million notional amount of the 4.125% public notes due
2014. In these contracts, TIFSA 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 maturity of the 6.75% public
notes during the second quarter of 2011, TIFSA settled the corresponding interest rate swaps. As of
September 30, 2011 and September 24, 2010, the total gross notional amount of the Company’s interest
rate swap contracts was $1.2 billion and $1.5 billion, respectively.
128 2011 Financials