E-Z-GO 2001 Annual Report Download - page 50

outstanding interest rate sw aps and received a payment of $15 million w hich is being amortized into
income over the remaining life of the original hedged debt. Textron M anufacturing had no outstanding
interest rate sw aps at year-end 2001.
Textron Finance entered into interest rate sw ap agreements to mitigate its exposure to interest rate
changes by converting certain of its fixed-rate receivables and debt issues to floating rates. The agreements
require Textron Finance to pay fixed-rate amounts in exchange for floating-rate amounts based on specified
notional amounts. Textron Finance has designated these agreements fair value hedges. Textron Finance
has also entered into interest rate sw ap, cap and floor agreements to mitigate its exposure on interest-
only securities resulting from securitizations. The sw ap agreements require Textron Finance to make
periodic variable payments in exchange for periodic fixed-rate receipts and vice versa based on specified
notional amounts. The cap and floor agreements require the payment of variable-rate amounts based on
specified notional amounts if interest rates exceed or fall below specified rates. These agreements are
designated as cash flow hedges. For cash flow hedges during 2001, Textron Finance recorded a charge of
$11 million, net of taxes, to accumulated OCL w ith no impact to the statement of income. For fair value
hedges at December 29, 2001, Textron Finance had interest exchange agreements w ith a fair value liability
of $6 million designated as fair value hedges of a fixed-rate receivable portfolio and debt. The fair value
hedges are highly effective resulting in an immaterial net impact to earnings due to hedge ineffectiveness.
Interest rate sw ap agreements are summarized as follows:
December 29, 2001 December 30, 2000
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Notional Interest Term Notional Interest Term
(Dollars in millions) Amount Rate (in Years) Amount Rate (in Years)
Textron Manufacturing:
Variable-pay sw aps ––– $415 6.91)%3.9
Textron Finance:
Fixed-pay swaps – debt –)–– $150 6.52)%2.0
Variable-pay swaps – debt $370 1.88% 0.6 –––
Variable-receive
sw aps – receivables $97 8.14% 12.0 $100 8.14)%12.6
Basis swaps*–)–– $715 6.77)%0.8
Forw ard starting
fixed-pay sw aps –)–– $228 7.31)%7.6
*Amounts at December 30, 2000 require U.S. Prime Rate-based payments, as stated above, and LIBOR-based receipts of 6.77% .
In addition, Textron Finance utilizes interest rate agreements to protect against the interest rate risk
associated w ith their retained interest in securitized assets. At year-end 2001 and 2000, Textron Finance
had $675 million and $509 million, respectively, of such agreements outstanding. During 2001, Textron
also entered into an interest rate agreement tied to the one-month LIBOR for $337 million that caps the
weighted average rate at 6.35% . Textron had minimal exposure to loss from nonperformance by the
counterparties to its interest rate sw aps at the end of 2001, and does not anticipate nonperformance by
counterparties in the periodic settlements of amounts due. Textron currently minimizes this potential for
risk by entering into contracts exclusively w ith major, financially sound counterparties having no less than
a long-term bond rating of “ A,” by continuously monitoring the counterparties’ credit ratings and by
limiting exposure w ith any one financial institution. The credit risk generally is limited to the amount by
which the counterparties’ contractual obligations exceed Textron’s obligations to the counterparty.
Currency Rate Hedging
Textron manufactures and sells its products in a number of countries throughout the world and, as a
result, is exposed to movements in foreign currency exchange rates. The primary purpose of Textron’s
foreign currency hedging activities is to manage the volatility associated with foreign currency purchases
of materials, foreign currency sales of its products and other assets and liabilities created in the normal
course of business. Textron primarily utilizes forward exchange contracts and purchased options with
maturities of no more than 18 months that qualify as cash flow hedges. These are intended to offset the
effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. The
fair value of these instruments at December 29, 2001 w as a $9 million liability. At year-end 2001, $7 million
of after-tax loss w as reported in accumulated OCL from qualifying cash flow hedges. This loss is generally
48 Textron Annual Report