E-Z-GO 2009 Annual Report Download - page 72

Textron Inc.
Concurrently with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with two counterparties, including an
underwriter and an affiliate of an underwriter of the Convertible Notes, for purposes of reducing the potential dilutive effect upon the conversion.
The initial strike price of the convertible note hedge transactions is $13.125 per share of our common stock (the same as the initial conversion
price of the Convertible Notes) and is subject to certain customary adjustments. The convertible note hedge transactions cover 45,714,300 shares
of common stock, subject to antidilution adjustments. We may settle the convertible note hedge transactions in shares, cash or a combination of
cash and shares, at our option. The cost of the convertible note hedge transactions was $140 million, which was recorded as a reduction to
additional paid-in capital. Separately and concurrently with entering into these hedge transactions, we entered into warrant transactions whereby
we sold warrants to each of the hedge counterparties to acquire, subject to anti-dilution adjustments, an aggregate of 45,714,300 shares of
common stock at an initial exercise price of $15.75 per share. The aggregate proceeds from the warrant transactions were $95 million, which was
recorded as an increase to additional paid-in capital.
We incurred cash and non-cash interest expense of $38 million in 2009 for these Convertible Notes. As of January 2, 2010, the unamortized
discount amount, including issuance costs totaled $129 million, resulting in a net carrying value of $471 million for the liability component.
Securitized On-Balance Sheet Debt
In 2008, the Finance group amended the terms of its aviation finance securitization, resulting in the consolidation of the special purpose entity.
This special purpose entity holds finance receivables previously sold as well as third-party notes under a revolving credit facility. These third-
party notes are reflected within securitized on-balance sheet debt.
6% Fixed-to-Floating Rate Junior Subordinated Notes
In 2007, the Finance group issued $300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes, which are unsecured and rank junior to
all of its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par on or after
February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042. The Finance group has agreed in a replacement capital
covenant that it will not redeem the notes on or before February 15, 2047 unless it receives a capital contribution from the Manufacturing group
and/or net proceeds from the sale of certain replacement capital securities at specified amounts. Interest on the notes is fixed at 6% until February
15, 2017 and floats at the three-month London Interbank Offered Rate + 1.735% thereafter.
Financial Covenants
Under a Support Agreement, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated
shareholder’s equity of no less than $200 million. In addition, TFC has lending agreements that contain provisions restricting additional debt,
which is not to exceed nine times consolidated net worth and qualifying subordinated obligations. Due to certain charges as discussed in Note
12, on December 29, 2008, Textron Inc. made a cash payment of $625 million to TFC, which was reflected as a capital contribution, to maintain
compliance with the fixed charge coverage ratio required by the Support Agreement and to maintain the leverage ratio required by its credit facility.
Additional cash payments of $270 million in 2009 and $75 million on January 12, 2010 were paid to TFC to maintain compliance with these
covenants.
Note 9. Derivatives
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2009 is minimal. We do not anticipate
nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized this potential for risk by entering
into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of A. The credit risk generally
is limited to the amount by which the counterparties’ contractual obligations exceed our obligations to the counterparty. We continuously monitor
our exposures to ensure that we limit our risks.
Fair Value Hedges
Our Finance group enters into interest rate exchange agreements to mitigate exposure to changes in the fair value of its fixed-rate receivables and
debt due to fluctuations in interest rates. By using these agreements, we are able to convert our fixed-rate cash flows to floating-rate cash flows.
Cash Flow Hedges
We manufacture and sell our products in a number of countries throughout the world, and, therefore, 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 flow hedges.
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