E-Z-GO 2003 Annual Report Download - page 56

At January 3, 2004, Textron Finance had $8 million of net of tax deferred losses recorded in OCL related
to terminated forward starting interest rate exchange agreements. These agreements were executed to
hedge the exposure to the variability in cash flows from anticipated future issuances of fixed-rate debt
and were terminated upon issuance of the debt. Textron Finance is amortizing the deferred losses into
interest expense over the remaining life of the hedged debt of 50 months and expects approximately $2
million, net of income taxes, deferred losses to be reclassified to earnings in fiscal 2004.
For cash flow hedges, Textron Finance recorded an after-tax gain of $11 million in 2003, and an after-tax
loss of $4 million in 2002 and $11 million in 2001 to accumulated OCL with no impact to the statement of
operations. Assuming no changes in interest rates, Textron Finance expects $1 million of net deferred
losses to be reclassified to earnings over the next year to offset interest payments made or received.
Textron Finance has not incurred or recognized any gains or losses in earnings as the result of the inef-
fectiveness 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 2003, 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 to any one financial institu-
tion. The credit risk generally is limited to the amount by which the counterparties’ contractual obliga-
tions exceed Textron’s obligations to the counterparty.
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 January 3, 2004 was a $20 million asset. At year-end 2003, $14
million of after-tax gain 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 2003 and the net impact of the related gains and losses on selling and administrative
expense in 2003 was not material.
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 $27 million after-tax gain during 2003, leaving an accumu-
lated net loss balance of $19 million.
Textron manages the expense related to stock-based compensation awards using cash settlement for-
ward contracts on its common stock. The use of these forward contracts modifies compensation
expense exposure to changes in the stock price with the intent to reduce potential variability. The fair
value of these instruments at January 3, 2004 and December 28, 2002 was a $25 million receivable and
$3 million payable, respectively. Gains and losses on these instruments are recorded as an adjustment
to compensation expense when the award is charged to expense. These contracts generated income of
$32 million in 2003 and expense of $4 million and $22 million in 2002 and 2001, respectively.
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