E-Z-GO 2010 Annual Report Download - page 73

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Based on the structure of the call options and warrants, these contracts meet all of the applicable accounting criteria for equity
classification under the applicable accounting standards and, as such, are classified in shareholders’ equity in the Consolidated
Balance Sheet. In addition, since these contracts are classified in shareholders’ equity and indexed to our common stock, they are not
accounted for as derivatives, and, accordingly, we do not recognize changes in their fair value.
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 11, 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. Cash payments of $383 million in 2010 and $270 million in 2009 were
paid to TFC to maintain compliance with the fixed charge coverage ratio. In addition, we paid $63 million on January 11, 2011
related to 2010.
Note 9. Derivatives and Fair Value Measurements
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the
asset or liability into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in
active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market
data exist, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and
include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that
are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants
would use in pricing the asset or liability based on the best information available in the circumstances. Valuation techniques for assets
and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the
cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.
These unobservable inputs are utilized only to the extent that observable inputs are not available or cost-effective to obtain.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The assets and liabilities that are recorded at fair value on a recurring basis consist primarily of our derivative financial instruments,
which are categorized as Level 2 in the fair value hierarchy. The notional and fair value amounts of these instruments that are
designated as hedging instruments are provided below:
Notional Amount
Asset (Liability)
(In millions) Borrowing Group
January 1,
2011
January 2,
2010
January 1,
2011
January 2,
2010
Assets
Interest rate exchange contracts*
Finance
$ 628
$ 1,333
$ 34
$ 43
Cross-currency interest rate exchange contracts
Finance
—
161
—
18
Investment in other marketable securities
Finance
51
—
51
—
Foreign currency exchange contracts
Manufacturing
534
696
39
54
Total
$ 1,213
$ 2,190
$ 124
$ 115
Liabilities
Interest rate exchange contracts*
Finance
$ 451
$ 32
$ (6)
$ (3)
Foreign currency exchange contracts
Manufacturing
101
80
(2)
(5)
Total
$ 552
$ 112
$ (8)
$ (8)
*Interest rate exchange contracts represent fair value hedges.