Sprint - Nextel 2011 Annual Report Download - page 55

Table of Contents
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies, and equity prices. The risk inherent in
our market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors.
Interest Rate Risk
The communications industry is a capital intensive, technology driven business. We are subject to interest rate risk primarily associated with our borrowings.
Interest rate risk is the risk that changes in interest rates could adversely affect earnings and cash flows. Specific interest rate risk includes: the risk of increasing interest
rates on floating-rate debt and the risk of increasing interest rates for planned new fixed rate long-term financings or refinancings.
About 95% of our debt as of December 31, 2011 was fixed-rate debt. While changes in interest rates impact the fair value of this debt, there is no impact to
earnings and cash flows because we intend to hold these obligations to maturity unless market and other conditions are favorable.
We perform interest rate sensitivity analyses on our variable rate debt. These analyses indicate that a one percentage point change in interest rates would have
an annual pre-tax impact of $10 million on our consolidated statements of operations and cash flows for the year ended December 31, 2011. We also perform a sensitivity
analysis on the fair market value of our outstanding debt. A 10% decline in market interest rates would cause a $927 million increase in the fair market value of our debt
to $19.2 billion.
Foreign Currency Risk
We also enter into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Our foreign exchange risk
management program focuses on reducing transaction exposure to optimize consolidated cash flow. We use foreign currency derivatives to hedge our foreign currency
exposure related to settlement of international telecommunications access charges and the operation of our international subsidiaries. The dollar equivalent of our net
foreign currency payables from international settlements was $8 million and the net foreign currency receivables from international operations was less than $1 million as
of December 31, 2011. The potential immediate pre-tax loss to us that would result from a hypothetical 10% change in foreign currency exchange rates based on these
positions would be insignificant.
Equity Risk
We are exposed to market risk as it relates to changes in the market value of our investments. We invest in equity instruments of public companies for
operational and strategic business purposes. These securities are subject to significant fluctuations in fair market value due to volatility of the stock market and industries
in which the companies operate. These securities, which are classified in investments on the consolidated balance sheets, primarily include equity method investments,
such as our investment in Clearwire and available-for-sale securities.
In certain business transactions, we are granted warrants to purchase the securities of other companies at fixed rates. These warrants are supplemental to the
terms of the business transaction and are not designated as hedging instruments.
The consolidated financial statements required by this item begin on page F-1 of this annual report on Form 10-K and are incorporated herein by reference.
The financial statements of Clearwire, as required under Regulation S-X, are filed pursuant to Item 15 of this annual report on Form 10-K and incorporated herein by
reference.
None.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information
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Item 7A. Quantitative and Qualitative Disclosures About Market Ris
k
Item 8. Financial Statements and Supplementar
y
Data
Item 9. Chan
g
es in and Disa
g
reements with Accountants on Accountin
g
and Financial Disclosure
Item 9A. Controls and Procedures