E-Z-GO 2005 Annual Report Download - page 76

Textron Finance has committed bank lines of credit of $1.5 billion, of which $500 million expires in July 2006 and $1.0 billion expires in 2010.
The $500 million facility includes a one-year term out option that can effectively extend its expiration into 2007. Textron Finance’s lines of credit,
not reserved as support for outstanding commercial paper or letters of credit at December 31, 2005, were $300 million. None of these lines of
credit was used at December 31, 2005 or January 1, 2005. Lending agreements limit Textron Finance’s net assets available for dividends and
other payments to Textron Manufacturing to approximately $384 million of Textron Finance’s net assets of $1.1 billion at the end of 2005. These
lending agreements also contain various restrictive provisions regarding additional debt (not to exceed 800% of consolidated net worth and qual-
ifying subordinated obligations), minimum 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 2005. The payment schedule excludes
amounts that are payable under or supported by the primary revolving credit facilities or revolving lines of credit:
(In millions) 2006 2007 2008 2009 2010
Textron Manufacturing $ 8 $ 37 $ 343 $ 3 $ 254
Textron Finance 1,035 1,088 823 542 557
$ 1,043 $ 1,125 $ 1,166 $ 545 $ 811
Textron Manufacturing has agreed to cause Textron Finance to maintain certain minimum levels of financial performance. No payments from
Textron Manufacturing were necessary in 2005, 2004 or 2003 for Textron Finance to meet these standards.
Cash paid for interest by Textron Manufacturing totaled $108 million, $106 million and $113 million in 2005, 2004 and 2003, respectively, and
included $5 million, $4 million and $5 million in 2005, 2004 and 2003, respectively, paid to Textron Finance. Cash paid for interest by Textron
Finance totaled $204 million, $157 million and $182 million in 2005, 2004 and 2003, respectively.
Note 10. Derivatives and Other Financial Instruments
Fair Value Interest Rate Hedges
Textron Manufacturing manages interest cost using a mix of fixed- and variable-rate debt. To manage this mix in a cost efficient manner, Textron
Manufacturing enters into interest rate exchange agreements to swap, at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed upon notional principal amount. These hedges are considered perfectly effective 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 mark-to-market values of both the fair value hedge instruments and underlying debt obligations are recorded as
equal and offsetting realized gains and losses in Interest Expense. At December 31, 2005, Textron Manufacturing had interest rate exchange
agreements with a fair value liability of $10 million. In addition, Textron Manufacturing had $5 million of deferred gains related to discontinued
hedges that are being amortized as an adjustment to Interest Expense over the remaining life of the underlying debt of 33 months.
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 fluctuations in interest rates. These agreements convert the fixed-rate cash flows to floating-rate cash flows. At
December 31, 2005, Textron Finance had interest exchange agreements with a fair value liability of $43 million designated as fair value hedges,
compared with $11 million at January 1, 2005.
Textron Finance utilizes foreign currency interest rate exchange agreements to hedge its exposure, in a Canadian dollar functional currency sub-
sidiary, 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 December 31, 2005, these instruments had a fair value liability of $9 million, com-
pared with $6 million at January 1, 2005. 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 Finance as a result of the securitization 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 income
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Textron Inc.