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29
Textron Inc.
Foreign Exchange Risks
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 2004, the impact of foreign exchange rate changes from 2003
increased revenues by approximately $287 million (2.9%) and increased segment profit by approximately $27 million (3.5%).
Textron Manufacturing manages its exposures to foreign currency assets and earnings primarily by funding certain foreign cur-
rency denominated assets with liabilities in the same currency and, as such, certain exposures are naturally offset. During 2004,
Textron Manufacturing primarily used borrowings denominated in Euro and British Pound Sterling for these purposes.
In addition, as part of managing its foreign currency transaction exposures, Textron Manufacturing enters into foreign currency
forward exchange and option contracts. These contracts are generally used to fix the local currency cost of purchased goods or
services or selling prices denominated in currencies other than the functional currency. The notional amount of outstanding for-
eign exchange contracts, foreign currency options and currency swaps was approximately $493 million at the end of 2004 and
$519 million at the end of 2003.
Quantitative Risk Measures
Textron utilizes a sensitivity analysis to quantify the market risk inherent in its financial instruments. Financial instruments held by
Textron that are subject to market risk (interest rate risk, foreign exchange rate risk and equity price risk) include finance receiv-
ables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange agreements, foreign exchange con-
tracts, marketable equity securities and marketable security price forward contracts.
Presented below is a sensitivity analysis of the fair value of Textron’s financial instruments entered into for purposes other than
trading at year-end. The following table illustrates the sensitivity to a hypothetical change in the fair value of the financial instru-
ments at year-end assuming a 10% decrease in interest rates, a 10% strengthening in exchange rates against the U.S. dollar and a
10% decrease in the quoted market prices of applicable marketable equity securities. The estimated fair value of the financial
instruments was determined by discounted cash flow analysis and by independent investment bankers. This sensitivity analysis is
most likely not indicative of actual results in the future.
2004 2003
Sensitivity of Sensitivity of
Fair Value Fair Value
Carrying Fair to a 10% Carrying Fair to a 10%
(In millions)
Value* Value* change Value* Value* change
Interest Rate Risk
Textron Manufacturing:
Debt $ (1,791) $ (1,902) $ (34) $ (2,027) $ (2,177) $ (38)
Interest rate exchanges (2) (2) 4 (1) (1) 5
Textron Finance:
Finance receivables 4,888 4,842 42 4,313 4,274 43
Interest rate exchanges – receivables 12 12 4 (15) (15) (6)
Debt (4,783) (4,864) (66) (4,407) (4,552) (48)
Interest rate exchanges – debt 3 3 10 22 22 7
Foreign Exchange Rate Risk
Textron Manufacturing:
Debt (779) (817) (82) (683) (751) (75)
Foreign currency exchange
contracts 34 34 36 20 20 48
Equity Price Risk
Textron Manufacturing:
Available for sale securities — — — 24 24 (2)
Marketable security price
forward contracts 31 31 (14) 25 25 (12)
* Asset or (liability)