E-Z-GO 2007 Annual Report Download - page 78

Textron Inc.
Cash Flow Interest Rate Hedges
We experience variability in the cash fl ows we receive from our Finance group’s investments in interest-only securities due to fl uctuations in
interest rates. To mitigate our exposure to this variability, our Finance group enters into interest rate exchange, cap and fl oor agreements. The
combination of these instruments converts net residual fl oating-rate cash fl ows expected to be received by our Finance group to fi xed-rate cash
fl ows. Changes in the fair value of these instruments are recorded net of the income tax effect in other comprehensive income (loss). At December
29, 2007 and December 30, 2006, these instruments had an insignifi cant value. We do not expect a signifi cant amount of deferred gains, net of
tax to be reclassifi ed to earnings related to these hedge relationships in 2008.
For cash fl ow hedges, our Finance group recorded an after-tax loss of $3 million in 2007, an after-tax gain of $1 million in 2006 and an after-tax
loss of $5 million in 2005 to accumulated other comprehensive loss with no impact to the statements of operations. We have not incurred a
signifi cant net gain or loss in earnings as the result of the ineffectiveness, or the exclusion of any component from our assessment of hedge
effectiveness, in 2007 or 2006.
Our exposure to loss from nonperformance by the counterparties to our interest rate exchange agreements at the end of 2007 is minimal. We do
not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We currently minimize this potential for risk by
entering into contracts exclusively with major, fi nancially sound counterparties having no less than a long-term bond rating of A, by continuously
monitoring such credit ratings and by limiting exposure to any one fi nancial 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
purchases of materials, foreign currency sales of 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 fl ow hedges. These are
intended to offset the effect of exchange rate fl uctuations on forecasted sales, inventory purchases and overhead expenses. The fair value of these
instruments was a $40 million and $13 million asset at the end of 2007 and 2006, respectively. At year-end 2007, $34 million in after-tax income
was reported in accumulated other comprehensive loss from qualifying cash fl ow hedges. This income generally is expected to be reclassifi ed to
earnings in the next 18 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 fi nancing transactions. The fair value of these instruments at the end of 2007 and
2006 and the net impact of the related gains and losses on selling and administrative expense in 2007 and 2006 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
exposures 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 refl ected in the cumulative translation adjustment account within other comprehensive income (loss), produced a $24 million
after-tax loss during 2007, leaving an accumulated net loss balance of $43 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 modifi es compensation expense exposure to changes in the stock price with the intent to reduce potential variability.
The fair value of these instruments at December 29, 2007 and December 30, 2006 was a receivable of $62 million and $24 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 $53 million in 2007, $21 million in 2006 and $8 million in 2005. Cash received or paid on the contract
settlement is included in cash fl ows from operating activities, consistent with the classifi cation of the cash fl ows on the underlying hedged
compensation expense.
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