E-Z-GO 2004 Annual Report Download - page 74

Textron Finance has committed bank lines of credit of $1.5 billion of which $500 million expires in July 2005 and $1.0 billion
expires in 2008. The $500 million facility includes a one-year term out option that can effectively extend its expiration into 2006.
Textron Finance’s lines of credit, not reserved as support for outstanding commercial paper or letters of credit at January 1, 2005,
were $187 million. None of these lines of credit were used at January 1, 2005 or January 3, 2004. Lending agreements limit Tex-
tron Finance’s net assets available for dividends and other payments to Textron Manufacturing to approximately $451 million of
Textron Finance’s net assets of $1.0 billion at the end of 2004. These lending agreements also contain various restrictive provi-
sions regarding additional debt (not to exceed 800% of consolidated net worth and qualifying subordinated obligations), mini-
mum net worth ($200 million), creation of liens and the maintenance of a fixed charges coverage ratio (no less than 125%).
The following table shows required payments during the next five years on debt outstanding at the end of 2004. The payment
schedule excludes amounts that are payable under or supported by long-term credit facilities:
(In millions) 2005 2006 2007 2008 2009
Textron Manufacturing $ 433 $ 8 $ 37 $ 348 $ 3
Textron Finance 656 985 983 42 542
$ 1,089 $ 993 $ 1,020 $ 390 $ 545
Textron Manufacturing has agreed to cause Textron Finance to maintain certain minimum levels of financial performance. No pay-
ments from Textron Manufacturing were necessary in 2004, 2003 or 2002 for Textron Finance to meet these standards.
Cash paid for interest by Textron Manufacturing totaled $109 million, $117 million and $125 million in 2004, 2003 and 2002,
respectively, and included $4 million, $5 million and $8 million in 2004, 2003 and 2002, respectively, paid to Textron Finance.
Cash paid for interest by Textron Finance totaled $157 million, $182 million and $196 million in 2004, 2003 and 2002,
respectively.
Note 9 Derivatives and Other Financial Instruments
Fair Value Interest Rate 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 exchange agreements to agree to exchange, at specified inter-
vals, 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 exchange match and the other conditions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” are met, the hedge is considered perfectly effective. The mark-to-
market values of both the fair value hedge instruments and underlying debt obligations are recorded as equal and offsetting unreal-
ized gains and losses in interest expense. At January 1, 2005, Textron Manufacturing had $6 million of deferred gains related to
discontinued hedges. The deferred gains are being amortized as an adjustment to interest expense over the remaining life of the
underlying debt of 45 months. Textron Manufacturing has interest rate exchange agreements with a fair value liability of $2 million
at January 1, 2005.
Textron Finance enters into interest rate exchange 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 float-
ing rates. At January 1, 2005, Textron Finance had interest exchange agreements with a fair value of $11 million designated as fair
value hedges, compared with a fair value of $8 million at January 3, 2004.
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 as a result of changes in
both foreign currency exchange rates and Canadian Banker’s Acceptance rates. At January 1, 2005, these instruments had a fair
value liability of $6 million, compared with $1 million at January 3, 2004. Textron Finance’s fair value hedges are highly effective,
resulting in an immaterial net impact to earnings due to hedge ineffectiveness.
Cash Flow Interest Rate Hedges
Textron Finance enters into interest rate exchange, cap and floor agreements to mitigate its exposure to variability in the cash flows
received from its investments in interest-only securities resulting from securitizations, 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
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Textron Inc.