E-Z-GO 2013 Annual Report Download - page 73

60Textron Inc. Annual Report • 2013
4.50% Convertible Senior Notes and Related Transactions
On May 5, 2009, we issued $600 million of convertible senior notes with a maturity date of May 1, 2013 and interest payable
semiannually. The convertible notes were accounted for in accordance with generally accepted accounting principles, which
required us to separately account for the liability (debt) and the equity (conversion option) components of the convertible notes in a
manner that reflected our non-convertible debt borrowing rate at time of issuance. Accordingly, we recorded a debt discount and
corresponding increase to additional paid-in capital of $134 million at the issuance date. We amortized the debt discount utilizing
the effective interest method over the life of the notes, which increased the effective interest rate of the convertible notes from its
coupon rate of 4.50% to 11.72%. We incurred cash and non-cash interest expenses of $9 million in 2013, $25 million in 2012 and
$58 million in 2011 for these notes.
On May 1, 2013, our remaining convertible senior notes matured, and we paid the holders of the notes $215 million in settlement
of the face value of the notes. In addition, we issued 8.9 million shares of our common stock to converting holders in settlement of
the excess of the conversion value over the face value of the notes; however, after giving effect to the exercise of the related call
options and warrants discussed below, the incremental share settlement in excess of the face value of the notes resulted in a 7.4
million net share issuance.
Concurrently with the pricing of the convertible notes in May 2009, we entered into transactions with two counterparties, pursuant
to which we purchased from the counterparties call options to acquire our common stock and sold to the counterparties warrants to
purchase our common stock. The call options settled on May 1, 2013, while the warrants settled daily over a 45-day period
beginning on February 27, 2013. We acquired 8.9 million shares of our common stock upon the settlement of the call options and
issued an aggregate of 7.4 million shares of our common stock in connection with the settlement of the warrants during the first
half of 2013. The settlement of the call options and warrants resulted in a $41 million net increase in treasury stock during 2013.
On October 25, 2011, we entered into capped call transactions with the counterparties that covered an aggregate of 28.7 million
shares of our common stock as of the end of 2012. The capped calls had a strike price of $13.125 per share and a cap price of
$15.75 per share, which entitled us to receive the per share value of our stock price in excess of $13.125 up to a maximum stock
price of $15.75 at the expiration date. Upon expiration of the capped calls, the market price of our common stock exceeded the
maximum stock price, and we received $75 million in cash from the counterparties in the second quarter of 2013.
6% Fixed-to-Floating Rate Junior Subordinated Notes
The Finance group’s $299 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. During 2013, the Manufacturing group made a capital contribution to TFC for the repurchase of $1 million of
these notes. 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. Cash payments of $240 million and $182 million were made to
TFC in 2012 and 2011, respectively, to maintain compliance with the fixed charge coverage ratio.
Note 8. 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.