E-Z-GO 2004 Annual Report Download - page 49

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
reverse. Based on the evaluation of available evidence, we recognized future tax benefits, such as net operating loss carryforwards,
to the extent that we believe it is more likely than not that we will realize these benefits. We periodically assess the likelihood that
we will be able to recover our deferred tax assets and reflect any changes in our estimates in the valuation allowance, with a corre-
sponding adjustment to earnings or other comprehensive loss, as appropriate.
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable
income in prior carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation
allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.
See Note 13 to the consolidated financial statements for further detail.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in
proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we
have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or
judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment”
(“SFAS 123-R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supercedes
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123-R requires companies to
measure compensation costs for share-based payments to employees, including stock options, at fair value and expense such
compensation over the service period beginning with the first interim or annual period after June 15, 2005. The pro forma disclo-
sures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Textron is required
to adopt SFAS 123-R in the third quarter of fiscal 2005. Under SFAS 123-R, companies must determine the appropriate fair value
model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to
be used at date of adoption. The transition methods include prospective and retroactive adoption options. Management is evaluat-
ing the requirements of SFAS 123-R. Management believes the impact of adopting SFAS 123-R will result in additional expense of
approximately $15 million, net of income taxes, for 2005. This estimate is subject to change based on a number of factors, includ-
ing the actual number of stock option awards granted, changes in assumptions underlying the option value estimates, such as the
risk-free interest rate, and tax deductions for employee disqualifying dispositions, if any.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risks
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 exchange 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
exchange agreements did not significantly impact interest expense in 2004, 2003 or 2002.
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 exchange agreements. At January 1, 2005, floating-rate liabilities in
excess of floating-rate assets were $421 million, net of $2.0 billion of interest rate exchange agreements on fixed-rate long-term
debt and $168 million of interest rate exchange agreements on fixed-rate finance receivables. For Textron Finance, interest rate
exchange agreements designated as hedges of debt had the effect of decreasing interest expense by $40 million, $43 million and
$20 million in 2004, 2003 and 2002, respectively.