Motorola 2007 Annual Report Download - page 81

The Company designated the above interest rate swap agreements as part of fair value hedging relationships.
As such, changes in the fair value of the hedging instrument, as well as the hedged debt are recognized in earnings,
therefore adjusting the carrying amount of the debt. Interest expense on the debt is adjusted to include the
payments made or received under such hedge agreements. In 2007, the Company recorded an expense of
$2.3 million representing the ineffective portions of changes in the fair value of interest rate swap hedge positions.
These amounts are included in Other within Other income (expense) in the Company’s consolidated statements of
operations. In the event the underlying debt instrument matures or is redeemed or repurchased, the Company is
likely to terminate the corresponding interest rate swap contracts.
Additionally, one of the Company’s European subsidiaries has outstanding interest rate agreements (“Interest
Agreements”) relating to a Euro-denominated loan. The interest on the Euro-denominated loan is floating based on
3-month EURIBOR plus a spread. The Interest Agreements change the characteristics of interest rate payments
from short-term EURIBOR based variable payments to maximum fixed-rate payments. The Interest Agreements
are not accounted for as a part of a hedging relationship and, accordingly, the changes in the fair value of the
Interest Agreements are included in Other income (expense) in the Company’s consolidated statements of
operations. The weighted average fixed rate payments on these EURIBOR interest rate agreements was 6.71%.
The fair value of the Interest Agreements at December 31, 2007 and December 31, 2006 was $3 million and
$1 million, respectively. The fair value of the Interest Agreements would hypothetically decrease by $2 million (i.e.,
would decrease from $3 million to $1 million) if EURIBOR rates were to change unfavorably by 10% from
current levels.
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, creditworthy
financial institutions and does not anticipate nonperformance. In addition, the contracts are distributed among
several financial institutions, all of whom presently have investment grade credit ratings, thus minimizing credit
risk concentration.
Net Investment in Foreign Operations Hedge
At December 31, 2007 and 2006, the Company did not have any hedges of foreign currency exposure of net
investments in foreign operations.
Investments Hedge
During the first quarter of 2006, the Company entered into a zero-cost collar derivative (the “Sprint Nextel
Derivative”) to protect itself economically against price fluctuations in its 37.6 million shares of Sprint Nextel
Corporation (“Sprint Nextel”) non-voting common stock. During the second quarter of 2006, as a result of Sprint
Nextel’s spin-off of Embarq Corporation through a dividend to Sprint Nextel shareholders, the Company received
approximately 1.9 million shares of Embarq Corporation. The floor and ceiling prices of the Sprint Nextel
Derivative were adjusted accordingly. The Sprint Nextel Derivative was not designated as a hedge under the
provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Accordingly, to
reflect the change in fair value of the Sprint Nextel Derivative, the Company recorded a net gain of $99 million for
the year ended December 31, 2006, included in Other income (expense) in the Company’s consolidated statements
of operations. In December 2006, the Sprint Nextel Derivative was terminated and settled in cash and the
37.6 million shares of Sprint Nextel were converted to common shares and sold. The Company received aggregate
cash proceeds of approximately $820 million from the settlement of the Sprint Nextel Derivative and the
subsequent sale of the 37.6 million Sprint Nextel shares. The Company recognized a loss of $126 million in
connection with the sale of the remaining shares of Sprint Nextel common stock. As described above, the
Company recorded a net gain of $99 million in connection with the Sprint Nextel Derivative.
Prior to the merger of Sprint Corporation (“Sprint”) and Nextel Communications, Inc. (“Nextel”), the
Company had entered into variable share forward purchase agreements (the “Variable Forwards”) to hedge its
Nextel common stock. The Company did not designate the Variable Forwards as a hedge of the Sprint Nextel
shares received as a result of the merger. Accordingly, the Company recorded $51 million of gains for the year
ended December 31, 2005 reflecting the change in value of the Variable Forwards. The Variable Forwards were
settled during the fourth quarter of 2005.
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