E-Z-GO 2003 Annual Report Download - page 55

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Textron Manufacturing has agreed to cause Textron Finance to maintain certain minimum levels of finan-
cial performance. No payments from Textron Manufacturing were necessary in 2003, 2002 or 2001 for
Textron Finance to meet these standards.
Cash paid for interest by Textron Manufacturing totaled $117 million, $125 million and $156 million in
2003, 2002 and 2001, respectively, and included $5 million, $8 million and $16 million in 2003, 2002 and
2001, respectively, paid to Textron Finance. Cash paid for interest by Textron Finance totaled $182 mil-
lion, $196 million and $282 million in 2003, 2002 and 2001, respectively.
Textron adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as of
December 31, 2000. Upon adoption, a cumulative transition adjustment was recorded to increase accu-
mulated OCL by approximately $15 million, net of income taxes, to recognize the fair value of cash flow
hedges.
Textron Manufacturing’s policy is to manage interest cost using a mix of fixed- and variable-rate debt. To
manage this mix in a cost efficient manner, Textron Manufacturing will enter into interest rate swaps to
agree to exchange, at specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount. Since the critical terms of the debt
and the interest rate swap match and the other conditions of SFAS No. 133 are met, the hedge is consid-
ered perfectly effective. The mark-to-market values of both the fair value hedge instruments and under-
lying debt obligations are recorded as equal and offsetting unrealized gains and losses in interest
expense. In 2001 and in November 2002, Textron Manufacturing terminated all outstanding interest rate
swaps and recognized a gain of $15 million in each year. Hedge accounting was discontinued at the
date of the swap termination. The fair value adjustment on the debt related to the discontinued hedge is
being amortized into income over the remaining life of the debt. Textron Manufacturing entered into new
swap agreements in November 2002 and in March 2003 and had interest rate swaps with a fair value lia-
bility of $1 million at January 3, 2004.
Textron Finance enters into interest rate swap agreements in order to mitigate exposure to changes in
the fair value of its fixed-rate portfolios of receivables and debt due to changes in interest rates. These
agreements convert the fixed-rate cash flows to floating rates. At January 3, 2004, Textron Finance had
interest swap agreements with a fair value of $8 million designated as fair value hedges, compared with
a fair value of $42 million at December 28, 2002.
Textron Finance utilizes foreign currency interest rate exchange agreements to hedge its exposure, in a
Canadian dollar functional currency subsidiary, to changes in the fair value of $60 million U.S. dollar
denominated fixed-rate debt at the end of 2003 ($33 million at year-end 2002) as a result of changes in
both foreign currency exchange rates and Canadian Banker’s Acceptance rates. At January 3, 2004,
these instruments had a fair value liability of $1 million, compared with a fair value asset of $1 million at
December 28, 2002. Textron Finance’s fair value hedges are highly effective, resulting in an immaterial
net impact to earnings due to hedge ineffectiveness.
Textron Finance enters into interest rate swap, cap and floor agreements to mitigate its exposure to vari-
ability in the cash flows received from its investments in interest-only securities resulting from securitiza-
tions, which is caused by fluctuations in interest rates. The combination of these instruments convert net
residual floating-rate cash flows expected to be received by Textron Finance as a result of the securitiza-
tion trust’s assets, liabilities and derivative instruments to fixed-rate cash flows. Changes in the fair value
of these instruments are recorded net of the tax effect in other comprehensive income (loss) (OCL). At
January 3, 2004, these instruments had a fair value liability of $14 million, compared with a fair value of
$37 million at December 28, 2002. Textron Finance expects approximately $2 million of net tax deferred
losses to be reclassified to earnings related to these hedge relationships in fiscal 2004.
Textron Finance utilizes foreign currency interest rate exchange agreements to hedge the exposure
through March 2005, in a Canadian dollar functional currency subsidiary, to fluctuations in the cash
flows to be received on $107 million of LIBOR based variable rate notes receivable as a result of
changes in both foreign currency exchange rates and LIBOR. At January 3, 2004, these instruments
had a fair value of $26 million, compared with a fair value of $3 million at December 28, 2002. Textron
Finance expects approximately $3 million of net of tax deferred gains to be reclassified to earnings relat-
ed to these hedge relationships in fiscal 2004.