Motorola 2010 Annual Report Download - page 74

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and profitability benefits associated with our reorganization of business programs and employee separation costs,
(f) the Company’s ability and cost to repatriate funds, (g) the impact of the timing and level of sales and the
geographic location of such sales, (h) the impact of maintaining inventory, (i) future cash contributions to pension
plans or retiree health benefit plans, (j) the Company’s ability to collect on its Sigma Fund and other investments,
(k) the Company’s ability and cost to access the capital markets, (l) the Company’s ability to borrow and the
amount available under its credit facilities, (m) the Company’s ability to retire outstanding debt, (n) the Company’s
ability and cost to obtain performance related bonds, (o) adequacy of resources to fund expected working capital
and capital expenditure measurements, (p) expected payments pursuant to commitments under long-term
agreements, (q) the ability to meet minimum purchase obligations, (r) the Company’s ability to sell accounts
receivable and the terms and amounts of such sales (s) the outcome and effect of ongoing and future legal
proceedings, (t) the impact of recent accounting pronouncements on the Company, (u) the impact of the loss of key
customers, and (v) the expected effective tax rate and deductibility of certain items; and (6) “Quantitative and
Qualitative Disclosures about Market Risk,” about: (a) the impact of foreign currency exchange risks, (b) future
hedging activity and expectations of the Company, and (c) the ability of counterparties to financial instruments to
perform their obligations.
Some of the risk factors that affect the Company’s business and financial results are discussed in “Item 1A:
Risk Factors.” We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors”, and those
described elsewhere in this report or in our other Securities and Exchange Commission filings, could cause our
actual results to differ materially from those stated in the forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of December 31, 2010, we have $2.8 billion of long-term debt, including the current portion of long-term
debt, which is primarily priced at long-term, fixed interest rates. Of this total long-term debt amount, a $48 million
Euro-denominated variable interest loan has a hedge that changes the interest rate characteristics from variable to
fixed-rate. A hypothetical unfavorable movement of 10% in the interest rates would have an immaterial impact on
the hedge’s fair value.
Foreign Currency Risk
The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on
cash flows. The Company’s policy prohibits speculation in financial instruments for profit on exchange rate price
fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any
currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging
relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as
part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge
instruments must be highly correlated with changes in market values of the underlying hedged items both at the
inception of the hedge and over the life of the hedge contract.
The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the
financial instruments against losses or gains on the underlying operational cash flows or investments based on the
operating business units’ assessment of risk. The Company enters into derivative contracts for some of the
Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies
that can be traded on open markets. The Company typically uses forward contracts and options to hedge these
currency exposures. In addition, the Company enters into derivative contracts for some forecasted transactions,
which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge
accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging
activities. A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these
are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component
sourcing.
At December 31, 2010, the Company had outstanding foreign exchange contracts totaling $1.5 billion,
compared to $1.7 billion outstanding at December 31, 2009. Management believes that these financial instruments
should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these