E-Z-GO 2012 Annual Report Download - page 50

38 Textron Inc. Annual Report ● 2012
We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio. For the
Captive product line, the allowance is established as a percentage of non-recourse finance receivables, which have not been
identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience,
current delinquency and default trends, collateral values and both general economic and specific industry trends.
Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of
assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted
tax rates in effect for the year taxes are expected to be paid or recovered. Deferred income tax assets represent amounts available
to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions
and credits by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing
taxable temporary differences, taxable income in carryback years, available tax planning strategies and estimated future taxable
income. We recognize net tax-related interest and penalties for continuing operations in income tax expense.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in
proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We assess our
income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts,
circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax
benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon
settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where
applicable. We recognize net tax-related interest and penalties for continuing operations in income tax expense. If we do not
believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results
may include favorable or unfavorable adjustments to our estimated tax liabilities due to settlement of income tax examinations,
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 $0.7 billion and $0.6 billion at the end of 2012 and 2011, respectively.
The impact of foreign exchange rate changes for 2012 and 2011 from the prior year for each period is provided below:
(In millions) 2012 2011
Impact of foreign exchange rates increased (decreased):
Revenues $ (80) $ 77
Segment profit (10) 8
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 and foreign exchange rate risk) include finance receivables (excluding lease receivables), debt (excluding lease
obligations), interest rate exchange agreements and foreign currency exchange contracts.