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new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly
on a quarterly and annual basis.
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 these exposures and
adjust the mix, as necessary. For our Finance group, we limit our risk to changes in interest rates for the captive business with a
strategy of matching floating-rate assets with floating-rate liabilities, which includes the use of interest rate exchange agreements.
Foreign Exchange Risks
Our financial results are affected by changes in foreign currency exchange rates in the various countries in which our products are
manufactured and/or sold. 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 $0.6 billion at the end of 2011 and 2010.
The impact of foreign exchange rate changes for 2011 and 2010 from the prior year for each period is provided below:
(In millions)
2011
2010
Impact of foreign exchange rates increased (decreased):
Revenues
$ 77
$ (34)
Segment profit
8
(7)
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 and foreign currency exchange contracts.
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 and a 10% strengthening in exchange rates against the U.S. dollar:
2011
2010
(In millions)
Carrying
Value*
Fair
Value*
Sensitivity of
Fair Value
to a 10%
Change
Carrying
Value*
Fair
Value*
Sensitivity of
Fair Value
to a 10%
Change
Manufacturing group
Foreign exchange rate risk
Debt
$ (543)
$ (564)
$ (56)
$ (549)
$ (549)
$ (55)
Foreign currency exchange contracts
5
5
46
42
42
39
$ (538)
$ (559)
$ (10)
$ (507)
$ (507)
$ (16)
Interest rate risk
Debt
$ (2,328)
$ (2,561)
$ (14)
$ (2,172)
$ (2,698)
$ (22)
Finance group
Interest rate risk
Finance receivables
$ 2,415
$ 2,266
$ 90
$ 3,758
$ 3,544
$ 114
Debt, including intergroup
(2,467)
(2,347)
(24)
(3,975)
(3,843)
(47)
$ (52)
$ (81)
$ 66
$ (217)
$ (299)
$ 67
* The value represents an asset or (liability).
40
40 Textron Inc. Annual Report • 2011