E-Z-GO 2002 Annual Report Download - page 56

Textron Finance is required to make U.S. dollar payments based on LIBOR in exchange for fixed
receipts of Canadian dollars at specified notional amounts with a weighted average interest rate of 6%
over a remaining term of 2.1 years.
Textron Finance also utilizes interest rate agreements to protect against the interest rate risk associated
with its retained interest in securitized assets. Textron Finance’s interest rate swap, cap and floor agree-
ments related to its variable rate interest-only securities are summarized as follows:
December 28, 2002 December 29, 2001
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)
LIBOR-based swaps $ 407 4.79% 5.1 $ 371 5.71% 6.5
Prime-based swaps $ 77 9.07% 15.9 $ 112 9.00% 16.7
One-month LIBOR-based cap* $ 389 5.43% — $ 337 6.35% —
Prime-based floor* $ 129 8.75% — $ 148 8.73% —
Six-month LIBOR-based floor* — — — $ 12 5.34% —
* Represents interest cap or floor rate
For cash flow hedges during 2002 and 2001, Textron Finance recorded an after-tax charge of $4 million
and $11 million, respectively, to accumulated OCL with no impact to the statement of operations.
Assuming no changes in interest rates, Textron Finance expects $9 million of net deferred losses to be
reclassified to earnings over the next year to offset interest payments made or received, and expects
approximately $2 million, net of income taxes, to be reclassified to earnings as a result of the amortiza-
tion of deferred losses related to discontinued hedges. Textron Finance has not incurred or recognized
any gains or losses in earnings as the result of the ineffectiveness or the exclusion from its assessment
of hedge effectiveness of its cash flow hedges.
Textron had minimal exposure to loss from nonperformance by the counterparties to its interest rate
swaps at the end of 2002, 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 with major, financially sound counterparties having no less than a long-term bond rating of
“A,” by continuously monitoring such credit ratings and by limiting exposure with any one financial insti-
tution. The credit risk generally is limited to the amount by which the counterparties’ contractual obliga-
tions 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 purchas-
es of materials, foreign currency sales of its products and other assets and liabilities created in the nor-
mal 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 expens-
es. The fair value of these instruments at December 28, 2002 was a $4 million liability. At year-end 2002,
$3 million of after-tax loss was reported in accumulated OCL from qualifying cash flow hedges. This loss
is generally expected to be reclassified to earnings in the next 12 months as the underlying transactions
occur. Textron Manufacturing also enters into certain foreign currency derivative instruments that do not
meet hedge accounting criteria, and are primarily intended to protect against exposure related to inter-
company financing transactions and income from international operations. The fair value of these instru-
ments at year-end 2002 and the net impact of the related gains and losses on selling and administrative
expense was not material in 2002.
Net Investment Hedging
Textron hedges its net investment position in major currencies and generates foreign currency interest
payments, that offset other transactional exposures in these currencies. To accomplish this, Textron bor-
rows directly in foreign currency and designates a portion of foreign currency debt as a hedge of net
investments. In addition, certain currency forwards are designated as hedges of Textron’s related for-
eign net investments. Currency effects of these hedges which are reflected in the cumulative translation
adjustment account within OCL, produced a $5 million after-tax gain during 2002, leaving an accumulat-
ed net balance of $47 million.
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