E-Z-GO 2006 Annual Report Download - page 76

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continuously monitoring such credit ratings and by limiting exposure to any one financial institution. The credit risk generally is limited to the
amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty.
Cash Flow Foreign Exchange Rate Hedges
Since we manufacture and sell our products in a number of countries throughout the world, we are exposed to movements in foreign currency
exchange rates. The primary purpose of our foreign currency hedging activities is to manage the volatility associated with foreign currency pur-
chases of materials, foreign currency sales of its products, and other assets and liabilities created in the normal course of business. We primarily
utilize forward exchange contracts and purchased options with maturities of no more than 18 months that qualify as cash flow hedges. These are
intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. The fair value of these
instruments at December 30, 2006 was a $13 million asset. At year-end 2006, $8 million in after-tax income was reported in accumulated other
comprehensive loss from qualifying cash flow hedges. This income generally is expected to be reclassified to earnings in the next 12 months as
the underlying transactions occur.
Our Manufacturing group also enters into certain foreign currency derivative instruments that do not meet hedge accounting criteria and primarily
are intended to protect against exposure related to intercompany financing transactions and income from international operations. The fair value
of these instruments at the end of 2006 and 2005 and the net impact of the related gains and losses on selling and administrative expense in 2006
and 2005 were not material.
Net Investment Hedging
We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other transactional expo-
sures in these currencies. To accomplish this, we borrow directly in foreign currency and designate a portion of foreign currency debt as a hedge
of net investments. We also may utilize currency forwards as hedges of our related foreign net investments. Currency effects of these hedges,
which are reflected in the cumulative translation adjustment account within other comprehensive income (loss), produced a $49 million after-tax
loss during 2006, leaving an accumulated net loss balance of $19 million.
Stock-Based Compensation Hedging
We manage the expense related to stock-based compensation awards using cash settlement forward contracts on our common stock. The use
of these forward contracts modifies compensation expense exposure to changes in the stock price with the intent to reduce potential variability.
The fair value of these instruments at December 30, 2006 and December 31, 2005 was a receivable of $24 million and $10 million, respectively.
Gains and losses on these instruments are recorded as an adjustment to compensation expense when the award is charged to expense. These
contracts increased net income by $21 million in 2006, $8 million in 2005 and $28 million in 2004. Cash received or paid on the contract settle-
ment is included in cash flows from operating activities, consistent with the classification of the cash flows on the underlying hedged compensa-
tion expense.
Fair Values of Financial Instruments
The carrying amounts and estimated fair values of our financial instruments that are not reflected in the financial statements at fair value are
as follows:
December 30, 2006 December 31, 2005
Estimated Estimated
Carrying Fair Carrying Fair
(In millions)
Value Value Value Value
Manufacturing group:
Debt $ (1,800) $ (1,833) $ (1,934) $ (2,012)
Finance group:
Finance receivables $ 7,019 $ 6,982 $ 5,589 $ 5,515
Debt $ (6,862) $ (6,868) $ (5,420) $ (5,423)
Finance receivables exclude the fair value of finance and leveraged leases totaling $1.2 billion at December 30, 2006 and $1.1 billion at December
31, 2005 as these leases are recorded at fair value in the consolidated balance sheets.
55
Textron Inc.