Motorola 2005 Annual Report Download - page 103

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96
In order to manage the mix of fixed and floating rates in its debt portfolio, the Company has entered into
interest rate swaps to change the characteristics of interest rate payments from fixed-rate payments to short-term,
LIBOR-based variable rate payments. During the year ended December 31, 2005, in conjunction with the repurchase
of an aggregate principal amount of $1.0 billion of long-term debt, the Company terminated a notional amount of
$1.0 billion of these swaps that were associated with the repurchased debt resulting in expense of approximately
$22 million which is identified as debt retirement within Other income (expense) in the Company's consolidated
statements of operations. The following table displays which interest rate swaps were outstanding at December 31,
2005:
Notional Amount
Hedged
Date Executed (in millions) Underlying Debt Instrument
August 2004 $1,200 4.608% notes due 2007
September 2003 457 7.625% debentures due 2010
September 2003 600 8.0% notes due 2011
May 2003 114 6.5% notes due 2008
May 2003 84 5.8% debentures due 2008
May 2003 69 7.625% debentures due 2010
March 2002 118 7.6% notes due 2007
$2,642
The short-term LIBOR-based variable rate payments on the above interest rate swaps was 6.9% for the three
months ended December 31, 2005. The fair value of the interest rate swaps at December 31, 2005 and 2004, was
approximately $(50) million and $3 million, respectively. Except for these interest rate swaps, the Company had no
outstanding commodity derivatives, currency swaps or options relating to debt instruments at December 31, 2005 or
2004.
The Company designated its interest rate swap agreements as part of a fair value hedging relationship. Interest
expense on the debt is adjusted to include the payments made or received under such hedge agreements.
The Company is exposed to credit loss in the event of nonperformance by the counterparties to its swap
contracts. The Company minimizes its credit risk on these transactions by only dealing with leading, credit-worthy
financial institutions having long-term debt ratings of ""A'' or better and, does not anticipate nonperformance. In
addition, the contracts are distributed among several financial institutions, thus minimizing credit risk concentration.
Stockholders' Equity
Derivative instruments activity, net of tax, included in Non-Owner Changes to Equity within Stockholders'
Equity for the years ended December 31, 2005 and 2004 is as follows:
2005
2004
Balance at January 1 $(272) $(202)
Increase (decrease) in fair value 28 (86)
Reclassifications to earnings 246 16
Balance at December 31 $2$(272)
Fair Value Hedges
The Company recorded income of $1.5 million, $0.1 million and $3 million for the years ended December 31,
2005, 2004 and 2003, respectively, representing the ineffective portions of changes in the fair value of fair value
hedge positions. These amounts are included in Other within Other income (expense) in the Company's
consolidated statements of operations. The Company excluded the change in the fair value of derivative contracts
related to the changes in the difference between the spot price and the forward price from the measure of
effectiveness as these amounts are charged to Other within Other income (expense) in the Company's consolidated
statements of operations. Expense (income) related to fair value hedges that were discontinued for the years ended
December 31, 2005, 2004 and 2003 are included in the amounts noted above.