E-Z-GO 2000 Annual Report Download - page 48

Extraordinary Loss from Debt Retirement
During 1999, Textron retired $168 million of 6.625% debentures originally due 2007, $165 million of
8.75% debentures originally due 2022, $146 million of medium term notes with interest rates ranging
from 9.375% to 10.01%, and other debt totaling $74 million with effective interest rates ranging
from 8.25% to 10.04%. In connection with the retirement of this long-term high coupon debt,
Textron terminated $479 million of interest rate exchange agreements designated as hedges of the
retired borrowings. As a result of these transactions, Textron recorded an after-tax loss in 1999 of
$43 million, which has been reflected as an extraordinary item.
Interest Rate Exchange Agreements
Textron is exposed to adverse movements in domestic and foreign interest rates. Interest rate
exchange agreements are used to help manage interest rate risk by converting certain variable-rate
debt or finance receivables to fixed-rate debt or finance receivables and vice versa. Textron Finance will
also enter basis swaps to lock-in desired spreads between certain interest-earning assets and certain
interest-bearing liabilities. Additionally, Textron will enter forward starting fixed-pay interest rate
exchange agreements to lock-in current interest rates for probable future issuances of long-term bor-
rowings. Interest rate exchange agreements are accounted for on the accrual basis with the differential
to be paid or received recorded currently as an adjustment to interest expense. Premiums paid to ter-
minate agreements designated as hedges are deferred and amortized to expense over the remaining
term of the original life of the contract. If the underlying debt is then paid early, unamortized premiums
are recognized as an adjustment to the gain or loss associated with the debt’s extinguishment.
Agreements that require the payment of fixed-rate interest are designated against specific long-
term variable-rate borrowings.
Textron Manufacturing interest rate exchange agreements are summarized as follows:
December 30, 2000 January 1, 2000
Textron Manufacturing
Weighted Weighted
Weighted Average Weighted Average
Notional Average Remaining Notional Average Remaining
(Dollars in millions) Amount Interest Rate Term Amount Interest Rate Term
Variable-pay interest rate
exchange agreements $415 6.91% 3.9 $852 6.39% 2.5
Fixed-pay interest rate
exchange agreements $ –– % –$941 4.69% 0.3
Textron Manufacturing’s variable pay interest rate exchange agreements were designated against
specific long-term fixed-rate debt. These agreements effectively adjusted the average rate of interest
on fixed-rate notes in 2000 to 6.9% from 7.0% and expire as follows: $26 million (11.3%) in 2001,
$35 million (10.4%) in 2002, and $354 million (6.6%) through 2020. Textron Manufacturing’s fixed pay
interest rate swap agreements, which expired in March 2000, were entered in June 1999 to insulate
Textron against potential interest rate increases on variable-rate debt around year-end 1999.
Textron Finance interest rate exchange agreements are summarized as follows:
December 30, 2000 January 1, 2000
Textron Finance
Weighted Weighted
Weighted Average Weighted Average
Notional Average Remaining Notional Average Remaining
(Dollars in millions) Amount Interest Rate Term Amount Interest Rate Term
Fixed-pay interest rate exchange
agreements – debt $150 6.52% 2.0 $300 5.76% 0.8
Variable-receive interest rate
exchange agreements – receivables $100 8.14% 12.6 $ – –% –
Basis swaps* $715 6.77% 0.8 $125 5.84% 0.4
Forward starting fixed-pay
interest rate exchange
agreements $228 7.31% 7.6 $ – –% –
*Amounts at December 30, 2000 and January 1, 2000 require United States Prime Rate-based payments as stated above and
LIBOR-based receipts of 6.77% and 6.07%, respectively.
Derivatives and Foreign Currency Transactions9
TEXTRON 2000 ANNUAL REPORT 46