E-Z-GO 2009 Annual Report Download - page 48

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39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risks
Our financial results are affected by changes in the U.S. and foreign interest rates. As part of managing this risk, we seek to achieve a prudent
balance between floating- and fixed-rate exposures. We continually monitor our mix of floating- and fixed-rate exposures and adjust the mix, as
necessary, sometimes by entering into interest rate exchange agreements, based on our evaluation of internal and external factors. The
Manufacturing group did not enter into any interest rate exchange agreements in 2009, and the difference between the rates received and the rates
paid on interest exchange agreements did not have a material impact on interest expense in 2008 or 2007.
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 January 2, 2010, floating-rate liabilities in excess of floating-rate assets were
$0.6 billion, after considering interest rate exchange agreements and the treatment of $1.4 billion of floating-rate loans with index-rate floors as
fixed-rate loans. These loans have index rates that are, on average, 219 basis points above the applicable index rate (predominately the Prime
rate). The Finance group has benefited from interest rate floor agreements in the recent low rate environment; however, in a rising rate
environment, this benefit will dissipate until the Prime rate exceeds the floor rates embedded in these agreements. The net effect of interest rate
exchange agreements designated as hedges of debt decreased interest expense for our Finance group by $56 million in 2009 and by $25 million
in 2008 and increased interest expense by $25 million in 2007.
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which our
products are manufactured and/or sold. The impact of foreign exchange rate changes for 2009 and 2008 from the prior year for each period is
provided below.
(In millions) 2009 2008
Impact of foreign exchange rates increased (decreased):
Revenues $ (51) $ 95
Segment profit (2) (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 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 exchange contracts
and foreign currency options was approximately $1.0 billion at the end of 2009.
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 historically have
utilized forward contracts for our common stock to manage the expense related to our stock-based compensation awards. On January 21, 2010,
we settled our forward contract and have elected not to enter into a new contract in 2010.
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.
Textron Inc.