E-Z-GO 2012 Annual Report Download - page 75

Textron Inc. Annual Report ● 2012 63
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.
Capped Call Transactions
On October 25, 2011, we entered into capped call transactions with the counterparties for a cost of $32 million, which covered
17.1 million shares of our common stock. We subsequently amended the capped call transactions to cover an additional 11.5
million shares of our common stock in lieu of $20 million we would have received from the counterparties related to the
amendment of the option and warrant transactions discussed above. At December 29, 2012, the capped calls covered an aggregate
of 28.7 million shares of our common stock (the number of shares into which all of the repurchased notes would have been
convertible). We purchased the capped calls in order to retain the potential value of the original call option and warrant
transactions which we would otherwise have given up upon the downsizing of those instruments. The capped calls have a strike
price of $13.125 per share and a cap price of $15.75 per share, which entitles us to receive at the May 2013 expiration date the per
share value of our stock price in excess of $13.125 up to a maximum stock price of $15.75. If the market price of our common
stock at the expiration date is less than $13.125, the capped call will expire with no value. The maximum value of the capped
calls, in the event that our stock price is at least $15.75 at the expiration date, is approximately $75 million. We may elect for the
settlement of the capped call transactions, if any, to be paid to us in shares of our common stock or cash or in a combination of
cash and shares of common stock. Based on the structure of the capped call, the transactions meet all of the applicable accounting
criteria for equity classification and will be classified within shareholders’ equity.
6% Fixed-to-Floating Rate Junior Subordinated Notes
The Finance group’s $300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes 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.
Support Agreement
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 2012, 2011 and 2010, cash payments of $240 million, $182
million and $383 million, respectively, were paid to TFC to maintain compliance with the fixed charge coverage ratio.
Note 9. Derivative Instruments 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, which 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.