E-Z-GO 2007 Annual Report Download - page 54

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our fi nancial 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 fl oating-rate debt to fi xed-rate debt and vice versa. The overall objective of our interest rate risk management is to
achieve a prudent balance between fl oating- and fi xed-rate debt. We continually monitor our mix of fl oating- and fi xed-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 signifi cantly impact interest expense in 2007, 2006 or 2005.
Our Finance group limits its risk to changes in interest rates with its strategy of matching fl oating-rate assets with fl oating-rate liabilities. This
strategy includes the use of interest rate exchange agreements. At December 29, 2007, fl oating-rate liabilities in excess of fl oating-rate assets
were $51 million, net of $2.3 billion of interest rate exchange agreements, which effectively converted fi xed-rate debt to a fl oating-rate equivalent.
Interest rate exchange agreements designated as hedges of debt had the net effect of increasing interest expense for our Finance group by
$25 million in 2007 and $27 million in 2006, and decreasing interest expense by $11 million in 2005.
Foreign Exchange Risks
Our fi nancial 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 2007, the impact of foreign exchange rate changes from 2006 increased revenues by approximately
$148 million (1.3%) and increased segment profi t by approximately $12 million (0.9%).
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
contracts generally are used to fi x 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 and foreign currency options was approximately
$1.2 billion at the end of 2007 and $765 million at the end of 2006.
Quantitative Risk Measures
In the normal course of business, we enter into fi nancial instruments for purposes other than trading. To quantify the market risk inherent in our
fi nancial instruments, we utilize a sensitivity analysis. The fi nancial instruments that are subject to market risk (interest rate risk, foreign exchange
rate risk and equity price risk) include fi nance receivables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange
agreements, foreign currency exchange contracts and marketable security price forward contracts.
Presented below is a sensitivity analysis of the fair value of fi nancial instruments outstanding at year-end. We estimate the fair value of the
fi nancial instruments using discounted cash fl ow analysis and indicative market pricing as reported by leading fi nancial news and data providers.
This sensitivity analysis is most likely not indicative of actual results in the future. The following table illustrates the sensitivity to a hypothetical
change in the fair value of the fi nancial instruments 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 price of the marketable equity security.
Textron Inc.