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64 Textron Inc. Annual Report ● 2012
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 fair value amounts of these instruments that are
designated as hedging instruments are provided below:
Asset (Liability)
(In millions) Borrowing Group Balance Sheet Location
December 29,
2012
December 31,
2011
Assets
Interest rate exchange contracts* Finance Other assets $ 8 $ 22
Foreign currency exchange contracts Manufacturing Other current assets 9 9
Total $ 17 $ 31
Liabilities
Interest rate exchange contracts* Finance Other liabilities $ (8) $ (7)
Foreign currency exchange contracts Manufacturing Accrued liabilities
(5) (5)
Total $ (13) $ (12)
*Interest rate exchange contracts represent fair value hedges.
The Finance group’s interest rate exchange contracts are not exchange traded and are measured at fair value utilizing widely
accepted, third-party developed valuation models. The actual terms of each individual contract are entered into a valuation model,
along with interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party
leading financial news and data providers. Credit risk is factored into the fair value of these assets and liabilities based on the
differential between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets
as compared with a standard AA-rated counterparty; however, this had no significant impact on the valuation at December 29,
2012. At December 29, 2012 and December 31, 2011, we had interest rate exchange contracts with notional amounts upon which
the contracts were based of $671 million and $848 million, respectively.
Foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this
technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data
providers. These are observable data that represent the rates that the financial institution uses for contracts entered into at that
date; however, they are not based on actual transactions so they are classified as Level 2. At December 29, 2012 and December
31, 2011, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $664 million
and $645 million, respectively.
Fair Value Hedges
Our Finance group enters into interest rate exchange contracts 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 contracts, we are able to convert our fixed-rate cash flows
to floating-rate cash flows. The amount of ineffectiveness on our fair value hedges and the gain (loss) recorded in the
Consolidated Statements of Operations were both insignificant in 2012 and 2011.
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 in the normal course of business. We primarily utilize forward exchange contracts and purchased options with maturities
of no more than three years that qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on
forecasted sales, inventory purchases and overhead expenses. At December 29, 2012, we had a net deferred gain of $5 million in
Accumulated other comprehensive loss related to these cash flow hedges. Net gains and losses recognized in earnings and
Accumulated other comprehensive loss on these cash flow hedges, including gains and losses related to hedge ineffectiveness,
were not material in 2012 and 2011. We do not expect the amount of gains and losses in Accumulated other comprehensive loss
that will be reclassified to earnings in the next twelve months to be material.