E-Z-GO 1999 Annual Report Download - page 37

Interest Rate Risks
Textron’s financial results are affected by changes in U.S. and foreign interest rates. As
part of managing this risk, the Company enters into interest rate exchange agreements
to convert certain variable-rate debt to long-term fixed-rate debt and vice versa. The
overall objective of Textron’s interest rate risk management is to achieve a prudent bal-
ance between floating and fixed-rate debt. The Company’s mix of fixed and floating rate
debt is continuously monitored by management and is adjusted, as necessary, based on
evaluation of internal and external factors.
Historically, Textron Manufacturing has financed foreign acquisitions with domestic
borrowings. In most cases, such borrowings are converted synthetically into foreign cur-
rency borrowings by means of foreign currency exchange agreements. Under the terms of
the agreements, Textron is obligated to make floating rate foreign currency interest pay-
ments to the counterparties, and the counterparties, in turn, are obligated to make floating
rate U.S. dollar interest payments to Textron. These payments are recorded as an adjust-
ment to interest expense. At year-end 1999, Textron Manufacturing has begun to utilize
actual foreign currency borrowings to finance foreign acquisitions and will continue to use
those instruments to manage its interest rate risks.
In June 1999, Textron entered into fixed rate interest rate exchange agreements to fix
the interest rate on certain foreign currency exchange agreements and other floating rate
debt. The purpose of the fixed rate interest rate exchange agreements, which all mature
by March 21, 2000, was to insulate Textron against potentially higher interest rates around
year-end 1999. The fixed rate interest rate exchange agreements have the following notional
principal amounts: $297 million in Euros; $344 million in British Pound sterling; and
$300 million in U.S. dollars.
The difference between the rates Textron Manufacturing received and the rates it paid on
interest rate exchange agreements did not significantly impact interest expense in 1999 or 1998.
Textron Finance’s strategy is to match interest-sensitive assets with interest-sensitive
liabilities to limit the Company’s exposure to changes in interest rates. As part of managing
this matching strategy, Textron Finance has entered into interest rate exchange agreements.
At year-end 1999, Textron Finance has also entered into a basis swap to lock-in desired
spreads between certain interest-earning assets and certain interest-bearing liabilities. The
difference between the variable-rate Textron Finance received and the fixed rate it paid on
interest rate exchange agreements increased its reported interest expense by $2 million in
1999; $2 million in 1998 and $1 million in 1997.
Foreign Exchange Risks and Euro Conversion
Textron’s financial results are affected by changes in foreign currency exchange rates or
weak economic conditions in the foreign markets in which products are manufactured
and/or sold. Textron Manufacturing’s primary currency exposures are the European
Common Currency (Euro), British Pound, and Canadian Dollar.
Textron Manufacturing manages its exposures to foreign currency assets and earnings
primarily by funding certain foreign currency denominated assets with liabilities in the
same currency and, as such, certain exposures are naturally offset. In addition, as part of
managing its foreign currency transaction exposures, Textron enters into foreign cur-
rency forward exchange contracts. These contracts are generally used to fix the local
currency cost of purchased goods or services or selling prices denominated in currencies
other than the functional currency.
The notional amount of outstanding foreign exchange contracts and currency swaps
was approximately $1.3 billion at year-end 1999 and 1998.
Effective January 1, 1999, the European Economic and Monetary Union entered into a
three-year transition phase during which a common currency, the Euro, was introduced in
participating countries. The legacy currencies will remain legal tender for cash transactions
between January 1, 1999 and January 1, 2002 at which time all legacy currencies will be
withdrawn from circulation and the new Euro denominated bills and coins will be used for
cash transactions. Textron has operations within the eleven participating countries that
began utilizing the Euro as their local currency in 1999. Additionally, Textron’s operations
in other European countries and elsewhere in the world are conducting business transac-
tions with customers and suppliers that are denominated in the Euro. The Euro conversion
has not had a material impact on Textron’s business.
Financial Risk
Management
1999 Textron Annual Report 35