E-Z-GO 2008 Annual Report Download - page 54

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41
Foreign Exchange Risks
Our financial 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 2008, the impact of foreign exchange rate changes from 2007 increased revenues by approximately
$90 million (0.7%) and decreased segment profit by approximately $2 million (0.1%).
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 our foreign currency transaction exposures, we also enter into foreign
currency forward exchange and option contracts. These contracts 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 currency exchange
contracts and foreign currency options was approximately $1.0 billion at the end of 2008 and $1.1 billion at the end of 2007.
Quantitative Risk Measures
In the normal course of business, we enter into financial instruments for purposes other than trading. To quantify the market risk inherent in our
financial instruments, we utilize a sensitivity analysis. The financial instruments that are subject to market risk (interest rate risk, foreign exchange
rate risk and equity price risk) include finance receivables (excluding lease receivables), debt (excluding lease obligations), interest rate exchange
agreements, foreign currency exchange contracts and marketable security price forward contracts for our common stock. We utilize forward
contracts for our common stock to manage the expense related to our stock-based compensation awards.
Presented below is a sensitivity analysis of the fair value of financial instruments outstanding at year-end. We estimate the fair value of the
financial instruments using discounted cash flow analysis and indicative market pricing as reported by leading financial 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 financial 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 our common stock.
2008 2007
Sensitivity of Sensitivity of
Fair Value Fair Value
Carrying Fair to a 10% Carrying Fair to a 10%
(In millions) Value* Value* Change Value* Value* Change
Manufacturing group:
Foreign exchange rate risk
Debt $ (653) $ (497) $ (50) $ (778) $ (776) $ (78)
Foreign currency exchange contracts (20) (20) 72 52 52 75
$ (673) $ (517) $ 22 $ (726) $ (724) $ (3)
Equity price risk
Forward contracts for Textron Inc. stock $ (98) $ (98) $ (4) $ 62 $ 62 $ (18)
Interest rate risk
Debt $ (2,438) $ (2,074) $ (10) $ (1,998) $ (2,021) $ (37)
Finance group:
Interest rate risk
Finance receivables held for investment $ 5,665 $ 4,828 $ 173 $ 7,364 $ 7,378 $ 33
Debt (7,549) (6,663) (105) (7,336) (7,309) (80)
Interest rate exchanges – debt 133 133 5 19 19 18
Interest rate exchanges – receivables (20) (20) (2) (1) (1) —
$ (1,771) $ (1,722) $ 71 $ 46 $ 87 $ (29)
* The value represents an asset or (liability).
Textron Inc.