E-Z-GO 2006 Annual Report Download - page 51

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recently Announced Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An interpretation of FASB Statement No. 109”
(“FIN 48”). This Interpretation provides a comprehensive model for the financial statement recognition, measurement, presentation and disclo-
sure of uncertain tax positions taken or expected to be taken in income tax returns. We will adopt this Interpretation in the first quarter of 2007 and
do not expect the adoption to have a material impact on our financial position or results of operations.
In July 2006, the FASB issued FASB Staff Position FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease Transaction.” This Staff Position amends SFAS No. 13, “Accounting for Leases” and
requires a recalculation of returns on leveraged leases if there is a change or projected change in the timing of cash flows related to income taxes
generated by the leveraged lease. In accordance with this guidance, the difference between the revised calculation of earnings since lease incep-
tion and the actual amount of cumulative earnings recognized is recorded in income from continuing operations. We are required to adopt this
guidance in the first quarter of 2007. Upon adoption, the estimated change in the projected cash flows must be reported as an adjustment to
retained earnings. The adoption of this Staff Position resulted in a $33 million reduction in retained earnings at the beginning of fiscal 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement replaces multiple existing definitions of fair
value with a single definition, establishes a consistent framework for measuring fair value and expands financial statement disclosures regarding
fair value measurements. This Statement applies only to fair value measurements that already are required or permitted by other accounting
standards and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning subsequent to November
15, 2007. We will adopt this Statement in the first quarter of 2008 and currently are evaluating its impact on our financial position and results
of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in U.S. and foreign interest rates. As part of managing this risk, we enter into interest rate exchange
agreements to convert certain floating-rate debt to fixed-rate debt and vice versa. The overall objective of our interest rate risk management is to
achieve a prudent balance between floating- and fixed-rate debt. We continually monitor our mix of floating- and fixed-rate debt and adjust the
mix, as necessary, based on our evaluation of internal and external factors. The difference between the rates our Manufacturing group received
and the rates it paid on interest rate exchange agreements did not significantly impact interest expense in 2006, 2005 or 2004.
Our Finance group limits its risk to changes in interest rates with its strategy of matching floating-rate assets with floating-rate liabilities. This
strategy includes the use of interest rate exchange agreements. At December 30, 2006, floating-rate liabilities in excess of floating-rate assets
were $431 million, net of $2.9 billion of interest rate exchange agreements that effectively converted fixed-rate debt to a floating-rate equivalent,
and $46 million of interest rate exchange agreements that effectively converted fixed-rate finance receivables to a floating-rate equivalent. Interest
rate exchange agreements designated as hedges of debt had the net effect of increasing interest expense for our Finance group by $27 million in
2006 and decreasing interest expense by $11 million and $40 million in 2005 and 2004, respectively.
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which prod-
ucts are manufactured and/or sold. For 2006, the impact of foreign exchange rate changes from 2005 increased revenues by approximately $11
million (0.1%) and increased segment profit by approximately $2 million (0.2%).
For our manufacturing operations, we manage exposures to foreign currency assets and earnings primarily by funding certain foreign currency
denominated assets with liabilities in the same currency so that certain exposures are naturally offset. We primarily use borrowings denominated
in euro and British pound sterling for these purposes.
In managing its foreign currency transaction exposures, we also enter into foreign currency forward exchange and option contracts. These con-
tracts generally are 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 foreign exchange contracts, foreign currency options and currency swaps was approxi-
mately $765 million at the end of 2006 and $699 million at the end of 2005.