E-Z-GO 2003 Annual Report Download - page 32

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We estimate the fair value of the retained interests based on the present value of future cash flows
expected using our best estimates of credit losses, prepayment speeds and discount rates commensu-
rate with the risks involved. These assumptions are reviewed each quarter, and the retained interests are
written down when the carrying value exceeds the fair value based on revised estimates and the decline
is estimated to be other than temporary. Based on our sensitivity analysis, as discussed in Note 3 to the
consolidated financial statements, a 20% adverse change in either the prepayment speed, expected
credit losses or the residual cash flows discount rate would not result in a material charge to income.
Assumptions used in determining projected benefit obligations and the fair values of plan assets for our
pension plans and other postretirement benefits are evaluated periodically by management in consulta-
tion with outside actuaries and investment advisors. Changes in assumptions are based on relevant
company data. Critical assumptions, such as the discount rate used to measure the benefit obligations,
the expected long-term rate of return on plan assets and healthcare cost projections, are evaluated and
updated annually. We have assumed that the expected long-term rate of return on plan assets will be
8.9%. Over the last 10- and 20-year periods, our pension plan assets have earned in excess of our cur-
rent assumed long-term rate of return on plan assets.
At the end of each year, we determine the discount rate that reflects the current rate at which the pen-
sion liabilities could be effectively settled. This rate should be in line with rates for high quality fixed
income investments available for the period to maturity of the pension benefits, and changes as long-
term interest rates change. At year-end 2003, we determined this rate to be 6.25%. Postretirement
benefit plan discount rates are the same as those used by our defined benefit pension plan in accor-
dance with the provisions of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits other
than Pensions.”
In the fourth quarter of 2003, we recorded a non-cash adjustment to equity through other comprehen-
sive loss of $35 million, after income taxes, to reflect additional minimum pension liability. Based on our
current assumptions, as well as the cumulative impact of market volatility over the last four years on the
value of our pension assets, we estimate that we will have no pension income, excluding curtailment
gains, in 2004 in comparison with $32 million in 2003.
The trend in healthcare costs is difficult to estimate, and it has an important effect on postretirement lia-
bilities. The 2003 healthcare cost trend rate, which is the weighted average annual projected rate of
increase in the per capita cost of covered benefits, was 10%. This rate is assumed to decrease to 5.0%
by 2009 and then remain at that level.
Textron’s financial results are affected by changes in U.S. and foreign interest rates. As part of managing
this risk, Textron enters into interest rate swap agreements to convert certain floating-rate debt to fixed-
rate debt and vice versa. The overall objective of Textron’s interest rate risk management is to achieve a
prudent balance between floating- and fixed-rate debt. Textron’s mix of floating- and fixed-rate debt is
continuously monitored by management and is adjusted, as necessary, based on evaluation of internal
and external factors. The difference between the rates Textron Manufacturing received and the rates it
paid on interest rate swap agreements did not significantly impact interest expense in 2003, 2002 or
2001.
Within its Finance segment, Textron’s strategy of matching floating-rate assets with floating-rate liabilities
limits its risk to changes in interest rates. This strategy includes the use of interest rate swap agree-
ments. At January 3, 2004, floating-rate assets were equal to floating-rate liabilities, after including the
impact of $1.9 billion of interest rate swap agreements on long-term debt and $238 million of interest
rate swap agreements on finance receivables. For Textron Finance, interest rate swap agreements had
the effect of decreasing interest expense by $43 million, $20 million and $1 million in 2003, 2002 and
2001, respectively.
Textron’s financial results are affected by changes in foreign currency exchange rates and economic
conditions in the foreign markets in which products are manufactured and/or sold. For fiscal 2003, the
impact of foreign exchange rate changes from fiscal 2002 increased revenues by approximately $313
million (3.0%) and increased segment profit by approximately $25 million (2.8%).