Philips 2006 Annual Report Download - page 94

Philips Annual Report 200694
The change in fair value of the hedges of transactions
in the case of a 10% appreciation in the euro versus the
US dollar and the pound sterling can be further broken
down as follows:
Sensitivity to a 10% increase in euro versus USD
in millions of euros
maturity 0-12
months
maturity > 12
months
Change in fair value of forwards (17 ) 4
Change in fair value of options 6 −
Sensitivity to a 10% increase in euro versus GBP
in millions of euros
maturity 0-12
months
maturity > 12
months
Change in fair value of forwards 18 −
During 2006 a net loss of less than EUR 1 million was
recorded in the income statement as a result of
ineffectiveness of transaction hedges.
Changes in the fair value of hedges related to translation
exposure of investments in foreign entities fi nanced by
debt are recognized in the income statement. The
changes in the fair value of these hedges related to
foreign exchange movements are offset in the income
statement by changes in the fair value of the hedged items.
Philips recorded a gain of EUR 236 million in other
comprehensive income under currency translation
differences as a result of net investment hedges
of investments in foreign subsidiaries. A loss of EUR
3 million was recognized in the income statement
as a result of ineffectiveness of these hedges.
Interest rate risk
Philips has signifi cant outstanding debt, which creates
an inherent interest rate risk. Failure to effectively hedge
this risk could negatively impact fi nancial results. At year-
end 2006, Philips had a ratio of fi xed-rate long-term debt
to total outstanding debt of approximately 74%, compared
to 69% one year earlier. At year-end, the Company held
EUR 6,023 million in cash and short-term deposits and
total debt of EUR 3,869 million. The Company partially
hedges the interest-rate risk inherent in the external
debt. As of year-end 2006, the company had six USD
interest rate swaps outstanding, on which the company
receives fi xed interest on the equivalent of EUR 387
million. Fair value hedge accounting is applied to these
interest rate swaps.
Certain past interest rate hedges related to bonds were
unwound during 2004. The fair value adjustments to the
bonds are amortized to the income statement based on
the recalculated effective yield. In 2006, a gain of EUR
5 million was released to the income statement.
As of December 31, 2006, the majority of debt consisted
of bonds. Of the EUR 3,006 million of long-term debt,
2.6% consisted of a bond with a so-called ‘embedded
put’ feature which carries an option for each holder to
put the bond to the Company on May 15, 2007 upon
notice received between March 15 and April 15, 2007.
A sensitivity analysis shows that if long-term interest
rates were to decrease instantaneously by 1% from
their level of December 31, 2006, with all other variables
(including foreign exchange rates) held constant, the fair
value of the long-term debt would increase by approximately
EUR 93 million. This change would be partially offset
through the change in fair value of the interest rate
swaps, which would increase by EUR 40 million. If there
was an increase of 1% in long-term interest rates, this
would reduce the market value of the long-term debt
by approximately EUR 93 million. This change would be
partially offset by the change in fair value of the interest
rate swaps, which would decrease by EUR 35 million.
If interest rates were to increase instantaneously by
1% from their level of December 31, 2006, with all other
variables held constant, the annualized net interest expense
would decrease by approximately EUR 46 million due to
the signifi cant cash position of the Company. This impact
is based on the outstanding net debt position at
December 31, 2006.
Liquidity risk
The rating of the company’s debt by major rating
services may improve or deteriorate. As a result, Philips’
borrowing capacity may be infl uenced and its fi nancing
costs may fl uctuate. Philips has various sources to mitigate
the liquidity risk for the group including EUR 6,023
million in cash and short-term deposits, a USD 2,500
million Commercial Paper Program and a USD 2,500
million committed revolving facility that could serve
6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group